MONGOLIA EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE (MEITI) MONGOLIA EIGHTH EITI RECONCILIATION REPORT 2013

Transcription

1 MONGOLIA EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE (MEITI) MONGOLIA EIGHTH EITI RECONCILIATION REPORT 2013 DECEMBER 2014

2 The Report and all appendices relating to the report are intended for the use of the National Council of the Mongolia Extractive Industries Transparency Initiative and the Multi-Stakeholder Working Group

3 This reconciliation report includes Appendices of 1,2,8,9,12,14,15,18,19,20,21 and 22. But Appendices of 3,4,5,6,7,10,11,13,16,17,23 are included on attached CD.

4 TABLE OF CONTENTS Abbreviations Introduction Executive summary Mongolia s Extractive Industries Reconciliation scope and methodology Results of the Reconciliation Additional surveys required by the terms of reference Other areas Recommendations Appendixies Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

5 ABBREVIATIONS MRAM WG CIT TASMV ATA FEMR LFEEMR USD ISA USA GMCDMRA MSDMRA MEGD DGD ERD ERP MSE ERD BZD CHR PSA MCO PAM FEPR LFEEPR GO G WT GOM CGM CRK CSO MONICPA MEITI MNMA SPIA SPIA VAT Mineral Resources Authority of Mongolia Working group (MEITI) Corporate income tax Tax on automobile and self moving vehicles Auto Transportation Authority Fee for Exploitation of mineral resources (royalty fee) Licence fee for exploitation and exploration of mineral resources United States Dollar (dollar) International Standards on Auditing United States of America Geological and mining cadastral department of Mineral Resources Mining survey department of Mineral Resources Authority Ministry of Environment and Green Development Bayangol District Environmental Resource Department Environment restoration pledge Ministry of Science and Education Environmental Resource Department Bayanzurkh District Republic of China Production Sharing Agreement Mongolian Customs Office Petroleum Authority of Mongolia Fee for Exploitation of petroleum resources ( oil royalty fee) Licence fee for exploitation and exploration of petroleum resources Governor s Office (Aimag, Capital. Soum, District) Governor Windfall tax Government of Mongolia Cabinet office of the Government of Mongolia Civil Representative Khural Civil society organizations Mongolian Institute of Certified Public Accountants Mongolian Extractive Industries Transparency Initiative Mongolian National Mining Association State professional inspection agency Professional inspection agency (Aimak) Value Added Tax 2 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

6 IFAC EITI LG NEMAM MM SSIGO DRCSBO SADTM NSOM NC RET FEPRA SKhD MCSTM MOF SBD FED FFPRAML FTD PWYPR MTA SPC SOE NGO MNT LHDF BPGB PIT JSC ML NEA CHD CRH VETA MSWG ChFDC NCMChH International Federation of Accountants Extractive Industries Transparency Initiative Local government National Emergency Management Agency of Mongolia Ministry for Mining State General Office for Social Insurance Department of Revenue control, State budget Office State academic drama theatre Mongolia National Statistical Office of Mongolia National Council Real Estate tax Finance and Economic Policy Regulation Authority SonginoKhairkhan district the Ministry of Culture, Sports and Tourism of mongolia Ministry of Finance Mongolia Sukhbaatar district Finance and Economic Department Finance and Fund Policy Regulation Authority of Ministry of Labor Finance and Treasury Department Publish what you pay, and received Mongolian Tax Authority State Property Committee State owned Entities Non-Government organization Mongolia national currency called togrog Law on Human Development Fund Border Protection General Board Limited Liability Company Personal Income Tax Joint Stock Company Ministry of Labour Nuclear Energy Authority Chingeltei district Citizens Representatives Hural Vocational Education and Training Authority Multi-Stakeholder Working Group The Children, Family and Development Centre National Centre for Maternal and Child's Health 3 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

7 Hart Nurse Ltd Chartered Accountants 89 High Street Thame, Oxfordshire OX9 3EH England Tel: Working Group of the Mongolia Extractive Industries Transparency Initiative WGMEITI C/o Mongolia EITI Secretariat Suite No.314, Tuushin Company Building, Amar s Street, Sukhbaatar district Ulaanbaatar, Mongolia Ulaanbaatar Audit Corporation 4th Floor, Margad Centre Building, 5th Khoroo, Chingeltei district, Ikh toiruu, Ulaanbaatar city, Mongolia Tel: , , Fax: Website: December 15, 2014 Hart Nurse Ltd and Ulaanbaatar Audit Corporation were appointed by the Mongolia Extractive Industries Transparency Initiative Secretariat to undertake the eighth EITI Reconciliation for Mongolia, for 2013 and to prepare a Report on this Reconciliation ( Engagement ) and conducted the contract. The audit reconciliation engagement for material revenue flow received by Government and paid by Mongolian mining, oil industries and exploration entities in 2013 carried out between 23 July 2014 and 15 November We performed the reconciliation works as required in the Terms of Reference in line with ISRS 4400 (International Standards on Related Services), Engagement to perform agreed-upon procedures regarding financial information. We report our findings in the accompanying report including its appendices. Because the procedures were not designed to constitute an audit or review made in accordance with International Standards on Auditing or International Standards on Review Engagements, we do not express any assurance on the transactions beyond the explicit statements set out in this report. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. Our report is for the purpose of informing the Multi-Stakeholder Working Group and National Council on the matters set out in the terms of reference. This report relates only to the subject matter specifically set out herein and does not extend to any financial statements of any entity taken as a whole Hart Nurse Ltd Chartered Accountant Ulaanbaatar Audit Corporation 3 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

8 1 INTRODUCTION This is the Eighth Mongolian EITI Reconciliation and Report, for the year Our report is for the purpose of informing the Multi-Stakeholder Working Group and the National Council on the matters set out in the terms of reference 1.1 OBJECTIVE The objective of the Engagement is to ensure, in compliance with the EITI Standard (2013), the transparency and credibility of the payments and receipts between government and companies in the mining and oil sectors in Mongolia. To this end, this Engagement entails an analysis and reconciliation of material payments and receipts in the fiscal year 2013 from the mining and oil sectors together with additional reporting on specified aspects of performance of the extractive sector. 1.2 PARTICIPANTS IN THE EITI RECONCILIATION Government entities receiving material payments from extractive companies, and companies making such payments, were required to participate in the reconciliation in accordance with a decision of the MEITI National Council. The government entities which took part are listed in Section 4.a,b and 5. A full list of companies required to report is included at Appendix 2, and the companies information is included at Appendix STRUCTURE OF THE REPORT The report contains:- 1. Introduction 2. Executive Summary 3. Mongolia s Extractive Industries 3.1 Mining 3.2 Oil and Gas 3.3 Production 3.4 Economic Contribution 3.5 Government Institutions 3.6 State owned enterprises 4 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

9 3.7 Budget processes 3.8 Revenue allocation 3.9 Action Plan for the Mining Sector 3.10 Licensing regime 4. Reconciliation Scope and Methodology 5. Results of the Reconciliation 6. Additional surveys required by the Terms of Reference 7. Other areas 8. Recommendations 9. Appendix There is a short overview of each section at the beginning of the section. 1.4 ACKNOWLEDGEMENT The consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation would like to express sincere thanks to team of the MEITI Secretariat, led by Mr. Tsolmon Sh, for supporting and assisting us with organisation of meetings with major officials from the government and its various organizations and agencies, as well as with mining companies; and for sending and receiving official confirmation letters to/from these parties. 5 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

10 2 EXECUTIVE SUMMARY 2.1 INTRODUCTION In this section, we set out i. a summary of the results of the MEITI reconciliation ii. a summary of government receipts from the extractive sector a. by department b. by type of flow iii. iv. surveys carried out in accordance with the terms of reference other matters reported on and in Section 2.4 we report our key findings. Details of the reconciliation results are set out in section 5 and in Appendix SUMMARY OF RESULTS OF THE MEITI RECONCILIATION Unreconciled differences Reported by government Government reported more than company The unreconciled differences are not material. Company reported more than government Reported by companies MNT millions MNT millions MNT millions MNT millions 1,576, ,576,051 Table GOVERNMENT RECEIPTS TOTAL GOVERNMENT RECEIPTS FROM THE SECTOR TOTAL RECEIPTS BY DEPARTMENT Total government receipts reported by each part of government participating in the reconciliation, shown together with amounts reported in the reconciliation, were:- 6 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

11 MNT millions Receipts from companies in 2013 that consolidated by MoF 1 Receipts reported in 2013 EITI Report % coverage Ministry of Finance 70,429 70, Tax Authority 1,032, , Ministry of Environment and Green Development 1,793 1, Mineral Resources Authority 35,064 20, Petroleum Authority 192, , Customs Office 79,789 70, Finance and Fund Policy Regulation Authority of Ministry of Labour 2 9,000 13, State Professional Inspection Agency 9,909 1, General Authority for Social Insurance 141, , Mongolian Nuclear Energy Authority and 2,957 1, Sub-total: Central Government 1,575,871 1,453, Governor s Office (Aimag, Capital. Soum, District) - aimag - 46,807 - capital - 20,049 - soum - 53,222 - district - 2,099 Sub-total: Local Government 2 107, , Total 1,683,618 1,576, Table-2 (See the detailed information from Appendix 1, 3 and 20 1 In 2013, Ministry of Finance provided us with consolidated receipts from 1,617 extractive companies 2 The percentage of government revenue from the 250 companies participating in the 2013 reconciliation report was high due to some missing amounts in the initial consolidated revenue report. Total government income from the extractive sector may be shown according to the department receiving the income. Major recipients are shown separately, government entities receiving less than MNT 10 billion of total income are shown as a single figure Other. 7 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

12 Total government receipts from extractive sector in ,747 35,064 70,429 79,789 23,659 Tax Authority Petroleum Authority 141, ,828 1,032,598 General Authority for Social Insurance Local Government Customs Office Chart-1 Ministry of Finance The share of total government income received by the different levels of government is shown in the diagram below. Government revenue received from extractive industry in 2013 Sub national government, 107,747 National government, 1,575,871 Chart-2 The government receipts from covered companies in the reconciliation are shown by general and local government budgets respectively as this chart below:- 8 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

13 Government receipts paid by covered companies in the reconciliation for 2013 /million MNT/ General Government budget, 1,453,837 Local Government budget, 122,177 Soum, 53,222 Capital, 20,049 District, 2,099 Aimag, 46,807 Chart TOTAL RECEIPTS BY FLOW MNT millions Taxes, fees, charges and dividends to central government budget 1,450,066 Taxes 492,923 Fees 668,216 Service charges 29,278 Dividends to state owned organisations 70,429 Payment to the government in advance 187,666 Others 1,553 Taxes, fees, charges, and dividends to local government budgets 86,752 Taxes to local government budgets 14,556 Fees 60,582 Dividends to local state-owned enterprises 7,817 Others 3,797 Donations and support to state owned organisations 39,197 Others - Total 1,576,014 Items declared by government only 1,576,014 Items declared by companies only 1,576,051 Table-3 9 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

14 2.3.2 SURVEYS REQUIRED BY THE TERMS OF REFERENCE In addition to the reconciliation, we have conducted analyses and surveys in accordance with the Terms of Reference, in particular:- 1. Analysis of implementation status of procedure set forth by order of Minister for Finance of Mongolia No.45, 2010 on records of donations and assistance given to each Government institutions and non-governmental organizations (see Section 6.1) 2. Survey on whether international financial reporting standards are being applied in companies 2013 financial statements, and of the audit status of companies financial statements (see Section 6.2) 3. Survey on the implementation status of annual mining plan and plan of natural rehabilitation work (see Sections 6.3 and 6.4) 4. Report on exploration and exploitation licences of the companies (see Section 6.5) 5. Survey of contracts concluded between extractive companies and local authorities under Mineral Law of Mongolia, 2006 and art.42 (see Section 6.6) 6. Survey of all independent members of Board of state and local state property companies (see Section 6.7) The report is produced in accordance with the EITI Standard 2013, which requires the inclusion of contextual information on the extractive industries; Section 3 contains information relevant to these requirements OTHER MATTERS Other areas reported on were:- 1. Infrastructure and barter arrangements (see section 7.1) 2. Social expenditures (see section 7.2) 3. Transportation (see section 7.3) 4. Beneficial ownership (see section 7.4) 2.4 KEY FINDINGS The key findings arising from the assignment are described in this section. We have a number of recommendations regarding the EITI process in Mongolia, which are set out in Section 8; and we include comment on progress made in implementing corrective actions and reforms recommended in previous reports. 10 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

15 2.4.1 SCOPE OF RECONCILIATION MATERIALITY The National Council defined the material flows that should be reported by companies at its meetings on 24 June 2010 where it was determined that the reconciliation should cover all taxes, payments, fees, charges and other payments which are more than MNT 10,000 - and on 23 December 2013, where it decided upon the 250 companies to be included in the reconciliation of year Reporting templates to be used in the 2013 reconciliation were agreed by the Council on 3 January The templates include payments in addition to those set out in the decision of 24th June 2010, although this is not referred to in the Terms of Reference for the assignment. The MEITI Secretariat provided us with the schedule of receipts by government from all extractive companies and the list of companies to be included in the reconciliation GOVERNMENT RETURN The schedule of receipts by Government is collated by the Ministry of Finance, which obtains the information from the various participating government departments at both a national and sub-national level and summarises it onto a single spreadsheet. In principle, this process (which has been followed for all previous reconciliations) provides total government receipts (for the flows included in each year s reconciliation) by flow, which is now a requirement under the EITI Standard. In examining the information, we noted that there was no formal assurance process (see ), and that the information contained some inaccuracies (see next section), although these were not material. It was not part of the Terms of Reference for the 2013 report to validate this information SELECTION OF COMPANIES Using the list of receipts provided by MOF, we established the 250 companies making the largest payments to government, according to the schedule of receipts, and observed that 91 of these companies were not included in the reconciliation. The MEITI Secretariat explained that they had reviewed the list and excluded companies which were included by the Ministry of Finance but which were not active in the extractive sector, or whose primary activity was not mineral, oil or gas extraction. The MEITI Secretariat selected another 91 companies for the 2013 reconciliation but not among the highest paying companies on the government schedule and we found that of the 91 companies selected for the 2013 reconciliation but not among the highest paying companies on the government schedule, 20 were below the MNT 40 million threshold set by the National Council. These companies fall outside the scope of the reconciliation under the materiality decision of the National Council. We did not review the original basis for selection, nor the method for exclusion of the companies by the Secretariat; it appears to be an issue with the original selection reported by the MOF. We recommend (section 8) that this be resolved prior to the next reconciliation. 11 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

16 We have included the companies selected by the Working Group in accordance with the Terms of Reference for the 2013 Report. With an appropriate caveat in respect of the issues noted above, we produced an analysis of the data, which may assist the National Council in its considerations of the materiality threshold for EITI reporting. Analysis of all government receipts - information provided by Ministry of Finance Band Number of companies Value of payments MNT 000 Cumulative % of total % of receipts in band >100 bn 4 1,065,508, % 62.7% < 100 bn > 50 bn 2 145,931, % 8.6% < 50 bn > 25 bn 5 191,603, % 11.3% < 25 bn > 10 bn 5 81,339, % 4.8% < 10 bn > 5 bn 6 44,495, % 2.6% <5 bn > 1bn 35 80,745, % 4.7% <1 bn > 900m 6 5,724, % 0.3% < 900m > 250m 90 39,250, % 2.3% < 250 m > 100m 96 17,097, % 1.0% <100 m 1,368 28,523, % 1.7% Total 1,617 1,700,219,871 Table- 4 This table shows that government received MNT 1.7 trillion from 1,617 companies; and that receipts from the 4 largest companies were MNT 1.06 trillion or 62.7% of the total. These 4 companies were:- Erdenet Mining Corporation Oyu Tolgoi Petro China Dachin Tamsag Mongolian Alt Amounts exceeding MNT 250 million were received from 153 companies, representing 97.3% of total receipts listed. Adding a further 96 companies only increase financial coverage by 1% but increases the number of reporting entities by nearly two-thirds. This methodology may be informative for assessing benefit and effort in future. 12 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

17 COLLATION AND REPORTING OF GOVERNMENT DATA The basis for preparation of the original list of companies requires examination, and the process for reviewing the list requires documenting in full, with details against any amendments. Consideration should be given to the individual central government entities reporting directly for the reconciliation, rather than through the Ministry of Finance; this would potentially make the process more transparent ASSURANCE MANAGEMENT REPRESENTATIONS COMPANIES We requested that a letter be provided from a member of company management making representations about the accuracy of the figures provided for the EITI reconciliation. This is an important part of obtaining assurance that the information may be relied upon. Responses were not received from 35 companies whose receipts, as reported by government, represented 20% of the value of receipts reported by government in respect of companies included in the 2013 Report (see Appendix 9 for details of letters received and Section 8 for our recommendation on this point) AUDIT REPORTS COMPANIES One of the representations made by companies was that the figures were consistent with their financial statements audited under international standards, and we requested that companies should provide a copy of the audit report relating to their accounts for companies did not provide an audit report, and of those 205 companies which did, 10 reports contained qualifications from the auditors (see Section 6.2 for further details) AUDIT OF COMPANY FIGURES The credibility of the MEITI process will be enhanced by improving the evidence of audit of the figures submitted by companies for reconciliation. It is the practice in a number of countries for the EITI returns for major companies to be signed off by the company s auditor. As Mongolia completes its 8 th EITI Report, this is an area which requires strengthening. 10 companies provided confirmation from their auditors of the figures submitted on their 2013 EITI templates. In addition to obtaining such audit confirmation from major private companies, state owned companies should provide similar assurance ASSURANCE FOR GOVERNMENT FIGURES Government entities are subject to annual audit by the National Audit Office. State and locally owned enterprises and enterprises with state participation and local participation subject to annual audit by the National Audit Office or a qualified auditing firm appointed by the National Audit Office. 13 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

18 The government spreadsheet of receipts is signed by State Secretary of the Ministry of Finance. There is, however, no representation or assurance given in respect of the government receipts declared to the Independent Administrator for EITI, and there is no indication of what the government signature signifies. As part of the review of presentation of government figures for EITI, this is an area which can be improved CONTRACT DISCLOSURE EITI Requirement 3.12 states that a) Implementing countries are encouraged to publicly disclose any contracts and licences that provide the terms attached to the exploitation of oil, gas and minerals; and b) It is a requirement that the EITI Report documents the government s policy on disclosure of contracts and licences that govern the exploration and exploitation of oil, gas and minerals. We approached oil and gas companies for copies of the PSAs; while the companies we approached would not provide copies of the PSAs explaining the contracts are rather thick and have many pages, they said that if necessary, they had no objection if we obtained copies from the Petroleum Authority of Mongolia. We wrote to the Minister of Mines explaining the information we had requested from the Petroleum Authority in connection with preparation of the 2013 EITI Report for Mongolia and requesting a statement of the government s policy on this matter. We also asked that in the event that there were issues of confidentiality affecting the request, that the Minister should set out the intentions of the Government to take the actions necessary to overcome these. The Deputy Minister responded, stating As per the law currently in force, there is no regulation covered confidentiality in major terms of Production sharing agreements to be included in the Extractive Industries Transparency Initiative 2013 reconciliation report. Therefore, it is considered to be there is no confidentiality issue affecting your request. We met with the senior officials of PAM and requested copies of the PSAs. They explained that there were confidentiality restrictions which prevented them from releasing copies without the agreement of the companies. They referred us to Clause 12 of the standard PSA, which contains a confidentiality provision. We noted that this refers only to the matters covered in Article 12 itself and not to matters such as the government participation in the PSA. We followed up our meeting with the PAM officials with a formal request in writing for the signatories to each PSA and the beneficial interest of the Government of Mongolia in each PSA PAM responded that it was not able to provide the information due to confidentiality restrictions RECONCILIATION RESULTS OVERVIEW OF RECONCILIATION Upon comparing the initial returns from reporting government entities and companies, it was noticeable that the value of the overall difference was lower than in previous years. On conclusion of the 14 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

19 reconciliation, the overall difference was very small, and the value of higher government reporting or lower government reporting in comparison with companies was also not financially significant. The total financial flows in 2013 were: (Million MNT) No. Revenue items Initial reconciliation Adjustment After adjustment GOM Company Difference GOM Company Difference GOM Company Diff eren ce. 1 Taxes, fees, charges and 1,473,336 1,428,787 44,549 (20,792) 23,604 (44,396) 1,452,544 1,452, dividends paid to Central Government budget 1.1 Tax 518, ,698 (30,634) (25,140) (55,741) 30, , ,957 (33) 1.2 Fees 666, ,566 42,859 4,270 46,932 (42,662) 670, , Service charges 30,571 19,395 11,176 (1,292) 9,883 (11,175) 29,278 29, Dividend on state 70,429 70,434 (6) - (6) 6 70,429 70,429 - property 1.5 Advance payments 187, ,705 58,961-58,961 (58,961) 187, ,666 - received by the Government 1.6 Other ,990 (37,808) 1,371 (36,425) 37,796 1,553 1,565 (12) 2 Taxes, fees, charges and 114, , (30,336) (29,392) (943) 84,273 84,389 (116) dividends paid to Local budget 2.1 Tax paid to local budget 14,733 14, (177) 244 (421) 14,556 14,568 (12) 2.2 Fees 65,696 64,501 1,195 (7,593) (6,350) (1,243) 58,103 58,151 (48) 2.3 Dividend on local state 7, , ,799 (7,797) 7,817 7,817 - property 2.4 Other 26,365 34,938 (8,573) (22,568) (31,085) 8,518 3,797 3,853 (56) 3 Donations and supports 11,684 22,517 (10,833) 27,512 16,753 10,759 39,197 39,270 (74) provided to state entity Total 1,599,629 1,565,086 34,544 (23,615) 10,965 (34,581) 1,576,014 1,576,051 (37) Table-5 15 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

20 The number of companies required to participate in the reconciliation has been steadily increasing and we suggest that the National Council should review the balance between wide engagement with extractive companies and the reporting burden which this imposes on the sector. The materiality considerations set out in section Table 6 below shows the number of reporting companies in each MEITI report:- (See the detailed information in Appendix 2) Activities No. Of companies Exploitation of Mineral Resources 120 Licence holder of mineral resources 100 Exploration and Extraction 20 Oil exploration 6 Oil extraction 2 Radioactive minerals exploration 2 Total 250 The number of companies that included in the each year reconciliation Table-6 No. of License holders registered with PAM No. of Companies prepared EITI report Year No. of Companies covered in the MOF report No. of Companies to be covered in the Reconciliation report decided by the WG Initial net difference (96,826.80) (23,442.40) (47,148.90) (265,507.70) 11, , , , Table-7 In Table 8 below, those companies where the initial difference exceeded MNT 60.0 billion are shown individually and the remaining companies are shown in total as amount of (positive, negative). It can be seen that the largest difference of overall initial difference arose from 6 companies out of the 250 which shown in table 8, and compared to total reported amount of MNT 1,599,629 million; it comprises 2% which is not significant in the context of the amounts reported. However, a large part of the effort by both the Independent Administrator and the reporting companies and government agencies was directed at identifying amounts which are not significant in the context of the total figures reported. The largest differences are shown in the table below. 16 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

21 (MNT million) No Company name Positive difference [1] (+) Percentage Negative difference [2] (-) Percentage Net difference [3] 1 Tavantolgoi JSC 68, ,017 2 Petrochina Daqing Tamsag 49, ,768 3 Erdenet Mining Corporation 34, ,236 4 Energy Recourse - - (60,653) 42 (60,653) 5 Oyu Tolgoi - - (34,267) 24 (34,267) 6 SouthGobi Sands - - (9,740) 7 (9,740) 7 Others 25, (38,313) 27 (12,817) Total 177, (142,973) ,544 Table-8 [1]- the amounts received by GOM are greater than the amounts paid by the Companies [2]- the amounts received by GOM are less than the amounts paid by the Companies [3]- The aggregated amount of positive and negative differences We suggest strongly that the coverage of the reconciliation should be reviewed so that the MEITI objectives are met without unnecessary burden on the extractive sector, and so that government resources are directed to increasing the value of the sector for Mongolia. We understand that an electronic reporting system is being developed which may enable the reporting levels to be maintained while at the same time reducing the efforts involved NATURE OF RECONCILING ITEMS Notwithstanding our comments on the improved reporting and lower differences, there remain areas where companies reported on an accruals basis instead of a cash basis; and where in some cases, there was insufficient care in preparation of data; and where companies reported all the payments made to the Customs Office, whether they were included in the reconciliation or not; and in some cases, there were difficulties in obtaining satisfactory explanations and documentation for figures reported. These indicate the need to maintain a communication and training effort so that the process for future reconciliations is improved; and also the need for companies to embed the EITI reporting requirements in their own systems. There was on occasion confusion in reporting by government, most notably in that the government reported that it had received MNT 40,597 million in total from Oyu Tolgoi in However, this was not a cash financial flow for the year 2013, because the tax amount of MNT 40,597 million of Oyu 17 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

22 Tolgoi for the year 2013 was off-set with USD 50 million advance payment by Oyu Tolgoi to the Government of Mongolia in The USD 50 million advance payment to the Government of Mongolia from Oyu Tolgoi was reported and aggregated as Government prepaid income in the reconciliation report of EITI for the year NON-PARTICIPATING ENTITIES All government entities included in the reconciliation reported data for reconciliation. All companies completed and returned data templates with the exception of:- Mongolbulgargeo Two companies did not respond to persistent requests for information to explain differences between their reported figured and those reported by government:- Bujgar Ord Ugalzan Tsamhag The information received in respect of these companies is as follows: Mongolbulgargeo General No. Name of company The mining cadastre lists 3 mining licences against this company:- i. MV Dald-2 in Bumbugur soum in Bayankhongor aimag ii. MV Jargalantyn Am in Bayan-Ovoo soum in Bayankhongor aimag iii. MV Muxar Areg, Ovorchuluut, Sairyn Xudag in Galuut soum in Bayankhongor aimag Table-9 The company reported payments of MNT 612 million in the 2011 EITI Report and MNT 400 million in the 2012 EITI Report, which also notes that the company could not be contacted in connection with the difference between its reported payment and the government s reported receipt. On this basis, it does not appear that the company s omission is material Bujgar ord Registration No. Initial reconciliation (MNT) GOM Company Difference 108 Mongolbulgargeo , ,710.1 General No. Name of company Registration No. Initial reconciliation (MNT) GOM Company Difference 41 Bujgar Ord , , ,845.7 Table Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

23 The unresolved difference is not material Ugalzan Tsamhag General No. Name of company Registration No. Initial reconciliation (MNT) GOM Company Difference 177 Ugalzan Tsamhag , , ,879.4 The unresolved difference is not material. Table NATIONAL BUDGET REPORTING In reviewing the contribution of the extractive sector to Mongolia s economy, we noted that the published State Government revenue figures do not identify all receipts from the sector for example, corporate income tax. It may be that the underlying government reporting systems need to be changed so that this information can be readily reported. The National Council should discuss this matter further with the Ministry of Finance UNRESOLVED DIFFERENCES The overall unresolved differences are not financially material. We observe that the total unresolved differences due to Government accounted for local government 67%, General Department of Custom (GDP) 29% and Ministry of Finance accounted for 4%.We further observe that the GDC has not been prompt in assisting with resolving the differences, and has advanced a number of reasons for its inability to participate effectively TIMING OF THE RECONCILIATION EXERCISE The commencement of the EITI reconciliation report coincided with the busiest time of extractive industries, also with the most State, Government and entities vacation period, so it delayed receiving of information to clarify in the date stated in official letter, and caused significant delays in the process of reconciliation RESPONSE OF PARTICIPATING ENTITIES In general, the response from participating entities was satisfactory. There were, however a number of occasions where we had to explain the basis of EITI and the reasons for the reconciliation to company staff, suggesting that further work is needed in this area. Particular difficulties were experienced with certain government institutions Mongolian Customs Office Tax Division of Bayangol District Property and Land Relation Division, Songinokhairkhan district 19 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

24 Social Insurance Division of Sukhbaatar district Tax division of Sukhbaatar district Social Insurance Division of Chingeltei district In terms of speed of response and requirement to obtain clearances from senior officials for release of information. There were also difficulties with some participating companies. Details are set out in Appendices 16 and ANALYSIS OF RECONCILIATION RESULTS COMPANIES MAKING THE LARGEST PAYMENTS TO GOVERNMENT The top 10 companies in terms of payments to the state and local budget are shown below, with the amounts reported in the 2012 EITI Report shown by way of comparison: (in million MNT) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 507, , , , , ,968 86, ,657 77,575 67, ,921 57,922 45,534 41,393 37,703 33,933 44,900 33,670 25,342 37, Chart-4 From the diagram above, it can be seen that Erdenet Mining Corporation has generated the highest revenue for this 2 consecutive years. 20 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

25 Arkhangai Bayan-Ulgii Bayankhongor Bulgan Gobi-Altai Gobisumber Darkhan-Uul Dornogobi Dornod Dundgobi Zavkhan Uvurkhangai Umnugobi Sukhbaatar Selenge Tuv Uvs Khovd Khuvsgul Khentii Mongolia Eighth EITI Reconciliation Report LOCATION OF THE COMPANIES ACTIVITIES We examined records relating to mineral resources to determine in which area they are located based on the information provided forthe 250 companies that participated in the EITI Reconciliation Report, the geographical spread is as shown in the table which follows: License "А" License "Х" Total 0 Chart REVENUE GENERATED FROM THE COMPANIES TO THE NATIONAL BUDGET IN YEAR The chart below illustrates the taxes, fees, charges, donations and supports paid to the Government of Mongolia by the 250 companies by lines of their activities. 21 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

26 (in million MNT) 44,454 91,571 7,601 5, , , , ,349 Copper, molybdenum Coal oil gold metal other Rummage Spar Chart-6 For 2013, government received income consist of 52 percent of copper and molybdenum, 22 percent of coal, 12 percent oil ANALYSIS OF TAXES AND FEES PAID TO LOCAL BUDGETS Taxes, fees and penalties amounting to MNT 82,980,700 thousand paid to local budgets are shown in the table and chart below by the recipient aimags. Appendix 20 provides further details, for example recipients and payments. Recipient aimags Revenue thous.mnt Percentage Umnugobi 43,452, Orkhon 12,575, Bulgan 11,513, Capital city 3,444,855 4 Selenge 2,859,754 3 Tuv 2,165,238 3 Dornod 1,545,283 2 Others 5,423,808 7 Total 82,980, Table-12 Capital city 4% Chart 7 Taxes and fees paid to local budgets Selenge 3% Bulgan 14% Tuv 3% Dornod Others 2% 7% Orkhon 15% Umnugobi 52% ANALYSIS ON DONATIONS AND SUPPORTS CONTRIBUTED BY THE COMPANIES GOM reported that MNT 39,27 billion of donations and supports was contributed by the companies to government organizations and local governments. We obtained explanations and evidence from the companies and reconciled the amount and identified that MNT billion of donations and support 22 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

27 payments were received. The organizations which have received the largest donations and support payments are shown by the recipients and the companies received donations and supports less than MNT 800 million are shown by Other as follows (Please refer to Appendix 19 for detail): Recipients Donations thous.mnt Percent age Umnugobi aimag 16,717, Vocational 11,480, Education and Training Authority Nalaikh district- 4,178, Tuv aimag 1,865,308 5 Sukhbaatar aimag 1,051,126 3 Others 3,903, Total 39,196, Table-13 Tuv aimag 5% Sukhbaatar aimag 3% Nalaikh district 11% Vocational Training Centers 29% Donations and supports by the companies Others 10% Chart-8 Umnugobi aimag 42% ANALYSIS ON UNRESOLVED DIFFERENCES As has been previously explained, the level of unresolved differences following reconciliation was not material. The differences remaining unresolved are set out in the charts which follow, showing separately which reporting entities were involved. Chart 9 highlights the state government organization, while Chart 10 highlights the companies. Differences remaining unresolved due to government are those wherecompanies provided supporting documents in support of payments reported but the state organizations told us that they did not receive the amounts; and vice versa for differences described as due to companies. (See the detail Appendix 23) Differnces remaining unresolveed due to Government Organization Ministry of Finance 4% Customs Office 29% Local government 67% Chart-9 23 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

28 Differences remaining unresolved due to Companies Coge Gobi 5% MDFE 4% Others 4% Yong Sheng Ming 23% Mongolbulgargeo 64% Chart-10 The differences remain unresolved as the above companies did not provide us information during the reconciliation. 24 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

29 3 MONGOLIA S EXTRACTIVE INDUSTRIES 3.1 MINING 1 Mongolia s Government is supportive of its extractive industries and expects the country to benefit from them accordingly. Mongolia is rich in the coking coal necessary for the production of steel and the world s largest steel producer is only a short distance across the border: over 80% of Mongolia s trade is with China. Mongolia also holds the world s largest copper-gold deposit project, and whilst China is equally the world s largest consumer of copper demand from the Indian market is also expected to increase. There are further plans to build a 1,000 kilometre rail connection to the Tran-Siberian railway and to the Far East ports, providing Japanese, Korean, and Taiwanese customers for Mongolian mineral resources in addition to Russia itself. In each of these markets, and as well as its coal and copper, Mongolia can expect to find buyers for its iron, gold, oil, silver, and fluorspar. The map below shows the 15 most important mineral deposits in Mongolia, as identified by the Government of Mongolia under the 2006 Mongolia Minerals Law: Image from Mongolian news network Revenue generated by mining is expected to triple GDP by The extractive industries generate wider economic activity in Mongolia, including the building of power stations, infrastructure links, and coal- 1 Sources: Wall Street Journal; Rio Tinto Group; New Internationalist; Emerson Process Management; The Guardian; British Broadcasting Company; International Monetary Foundation; Mongolian Mining Journal; Coal Mongolia 2014 Conference; Reuters; Mining Journal; United States Energy Information Administration; Bloomberg; Oxford Business Group; United States Geological Survey; MDNews; Financial Post; Prime Business News Agency; Erdenet Mining Corporation; Mongolian Economy; Economic Research Institute, National University of Mongolia; Mining Leaders; ASM-PACE; United Nations Environment Programme; Beren Mining JSC; Voice of Mongolia; Mongolian Resources Corporation; Mongolia Newswire; Mongolia Nuclear Energy Authority 25 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

30 washing and metal processing plants. Recent legislation has gone some way to ensure the responsible and sustainable disbursement of mining revenue. The Government of Mongolia has promised every one of its citizen 536 shares in the state-owned mining company Erdenes Tavan Tolgoi when they are offered on the open market to support the expansion of the Tavan Tolgoi coal project. In doing so, the educational dividend of improved financial literacy is added to the political, economic, and social benefits of Mongolia s mining projects COAL Coal is Mongolia s largest export, both by value and by weight. Mongolia has over 300 known coal deposits containing an estimated 152 billion tonnes of coal resources, and 19.5 billion tonnes are already validated through prospecting and detailed exploring. Mongolia was the 20 th largest producer of coal in the world in Coal is both an important domestic and international resource. Mongolian coal exports are projected to reach 28.5 million tonnes in 2014, 90% of which are expected to be delivered to China. The proportion of coal mined in Mongolia that went for export rose from 44% of the total in 2009 to more than 56% of the total in At the same time, however, approximately 98% of Mongolia s electricity in 2012 was generated in its coal-fired power stations. The Tavan Tolgoi project is based over one of the world s largest coal deposits, and contains reserves estimated at 6 billion tonnes. The state-owned Erdenes Tavan Tolgoi Company holds the mining licence and extraction rights to the deposit, which are auctioned off to the highest bidder. Australian company Macmahon Holdings Ltd has been contracted for operations at five of the six sections of the deposit since 2012, and its contract is due to expire in 2017; the Mongolian Mining Corporation is responsible for operating on the remaining section. The majority of the coal from the mine is delivered to the Aluminum Corp of China FUTURE OF THE COAL INDUSTRY Whilst the market for Mongolian coal continues to be almost wholly based in China, in January 2011 Mongolia suspended all coal exports to China for a period of four months over a pricing disagreement. Mongolia intends to diversify its customer base by building transport routes to export coal globally through the port of Vladivostok COPPER Copper is Mongolia s second-largest export by value as well as fourth-largest export by weight. Mongolia had proven reserves of between 12 and 14 million tonnes in 2012 and estimated reserves of 84 million tonnes, making the country the world s 12 th largest source of copper. There are currently only two copper-producing projects in Mongolia: the Oyu Tolgoi deposit, situated in the Southern Gobi desert 550 km south of the capital, Ulaanbaatar; and the Erdenet deposit, some 250 km to the north west of Ulaanbaatar. 26 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

31 OYU TOLGOI PROJECT The Oyu Tolgoi mining deposit was first explored by a joint Mongolian-Soviet expedition that found evidence of copper mineralization in After the collapse of the Soviet Union, then-australian company BHP Minerals conducted further exploration on the central and southern deposits between 1997 and 1999, but discontinued owing to cutbacks in the company s exploration budget. Between May 2000 and September 2002, Canadian company Ivanhoe explored and finally confirmed the licence area s potential. The mine began construction in 2010 and the first phase was operative by July 2013, when the mine extracted and transported 76,000 tonnes of copper. The Oyu Tolgoi Mine is a combined open pit and underground mining project in Khanbogd Sum in the south Gobi desert. The project is jointly owned by the Government of Mongolia (with a 34% stake) and Turquoise Hill Resources (with a 66% stake, of which British-Australian company Rio Tinto owns 51%). Since 2010, Rio Tinto has also been the manager of the Oyu Tolgoi project. Rio Tinto believes that the deposit contains 2.7 million tonnes of recoverable copper in addition to 1.7 million ounces of recoverable gold, and the scale of the deposit at Oyu Tolgoi is such that the project is expected to be operative for over the next 50 years. The Oyu Tolgoi project is projected to produce an average of 430,000 tonnes of copper and 425,000 ounces of gold each year over its mining lifetime, and the site has been ranked among the top three copper and gold mines in the world in terms of total reserves. The value derived from Oyu Tolgoi alone is expected to account for one-third of Mongolia s Gross Domestic Product by By May 2013, Rio Tinto had spent US$6.2 billion on developing the site Future of the Oyu Tolgoi Mine The second phase of the project, involving the construction of the underground mine, was delayed after concerns about access to water, financing terms, cost overruns, existing feasibility studies, and an outstanding tax bill. In September 2014 Mongolia's Vice-Minister of Mining Oyun Erdenebulgan stated that the second phase of construction would begin in the first quarter of ERDENET PLANT Erdenet Mining Corporation was established in accordance with an agreement between governments of Mongolia and the Soviet Union, and remains today a joint Mongolian-Russian venture with state ownership of the company at 51% and 49% respectively. The mine yields 480,000 tonnes of copper each year and is therefore responsible for 18.8% of Mongolia s total export revenue Future of the Erdenet Plant Since 2012, the Corporation has developed by building its capacity to manufacture import substitutes for its faculties in its own machinery repair plant, including spare parts, metal and rubber structures, and moulded plastic products. The Corporation also plans to reopen Erdenet s airport. 27 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

32 3.1.3 IRON ORE Iron ore is Mongolia s third-largest export by value, and second-largest export by weight. Mongolia has 985 million tonnes of iron ore reserves, of around 0.6% of total global reserves. In March 2014 there were nine iron ore projects in Mongolia, six of which were operational and together producing iron ore and iron concentrate in approximately equal quantities. Estimates are that the existing nine projects will produce 281 million tonnes of iron between 2014 and Mongolian iron ore deposits occur in grades of between 30 and 35% iron, making it relatively simple and economical to upgrade the product to the 62% quality required by blast furnaces in steel production. This is a particularly valuable asset in Mongolia s geopolitical context. Inland Chinese iron mines have seen the quality of their ore fall from 35% to around 18% as the most attractive deposits were developed and subsequently exhausted. As such, Mongolian deposits increasingly supply inland Chinese iron ore processing facilities, which are prohibitively far from Chinese ports to be supplied by South American or Australian exports GOLD Mongolia extracted almost 8,904 kg of gold in 2013, of which 7,559 kg were exported and producing revenue of 310 million US Dollars. The Boroo gold mine, which is about 100 km North of Ulaanbaatar has been mined since 2003 and is close to depletion. It is one of the country's only hard-rock gold sources. Estimates indicate that Oyu Tolgoi contains 1,800 tonnes of recoverable gold in reserves. Small-scale miners (see section xx below), who extract alluvial gold, have historically carried out most gold mining in Mongolia. Environmental restoration concerns led to the cancellation of many licences in recent years mainly due to a law passed in 2009 that banned mining in water basins and forests FLUORIDE Fluoride is an alkali earth metal that widely used not only in the black and coloured metallurgy, but also used in the chemistry, medicine, and optical industry. By 1980, Mongolia was one of the largest export countries in fluoride behind only China and Mexico. Mongolia has been extracting 400 thousand tons of fluoride per year MOLYBDENUM In general, the market of molybdenum concentrate is slow due to its demand reduced in China. However, the main molybdenum mining has been producing constantly in specified amount. By 2013, a production volume of Molybdenum was at 3.8 thousand tons (content at 47%), which is down 4.7% compared to previous year, but nevertheless places Mongolia as the 13 th largest producer in the world ZINC 28 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

33 In the current level of geological surveys in Mongolian territory, 15 deposits and 120 discoveries of zinc and lead has founded and explored. By 2013, Mongolia extracted 104 thousand tonnes of zinc concentrate RANIUM There are large uranium deposits in Mongolia, with estimates of reserves being between 30 and 62 thousand tonnes. At present, Mongolia does not export any uranium There are 15 deposits of Uranium in Mongolia which of 3 are Deposits of Strategic Importance. (Mardain gol, Gurvanbulag and Dornod) In Mongolia, as of 2013 the number of special licence holders was 14 entities and special licences was 68 in Radioactive mineral sector and paid 3.2 billion MNT of licence fee for exploitation and exploration of mineral resources DEPOSITS OF STRATEGIC IMPORTANCE Minerals of strategic importance comprise water, oil, natural gas, radioactive minerals and rare earth elements. There are 15 deposits which are designated as Deposits of Strategic Importance in Appendix 1 of the State Great Khural Decree No.27 (2007). The definition of a Mineral Deposit of Strategic Importance is a deposit of a size which may have a potential impact on national security or the economic and social development of the country at national or regional levels; or one which is producing, or has the potential to produce, more than 5% of total GDP in a given year. According to article of the Mineral Law, the Government shall submit to the State Great Khural (Parliament) a proposal to establish the amount of the state-owned-percentage of the strategic importance mineral deposits. 29 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

34 Strategically important deposits are:- Deposit Name Mineral Type Reserves (1000 Composition tonnes) Nariin Sukhait Fossil Coal 126,000 - Baganuur Brown Coal 600,000 - Erdenet Copper, Molybdenum 1,200, % Cu and Mo Gurvan Bulag Uranium Oyu Tolgoi Copper, Gold 26,300 (Cu) (Ag) - Tavan Tolgoi Fossil Coal 6,400,000 - Shivee Ovoo Brown Coal 646,000 - Mardai Uranium Mornod Uranium Tomortei Iron 229, Fe Tsagaan Suvarga Copper, Molybdenum 10, % Cu and Mo Burenkhaan Phosphor 192, Phosphor Tumurtein Ovoo Zinc 7, % Zn Asgat Silver 6, g/ton Ag Boroo Gold g/ton Au Table-14 Source: Mineral Resources Authority of Mongolia ARTISANAL AND SMALL SCALE MINING There are an estimated 100,000 artisanal miners in Mongolia, collectively representing 20% of the country s rural workforce. Artisanal and Small-scale Mining (ASM) takes place in 19 of the 21 provinces in Mongolia. The majority of ASM miners (between 80 and 90%) mine gold, whilst the remainder mine for fluorspar and coal. Fluorspar is used as an input into manufactured products such as aluminium, gasoline, refrigerants, and steel, and can also be used in jewellery. Apparent climate change (including a series of harsh winters), falling agricultural returns, dramatic economic restructuring, and the high prices of gold in the last decade have contributed to the rise of ASM in Mongolia. ASM miners are both men and women, and may include former farmers, herders, factory workers, and white-collar workers. Mongolia has a dedicated program to support the positive contribution of ASM. In 2005, the Sustainable Artisanal Mining project was established in partnership with the Mineral Resources Authority of Mongolia (now with Ministry of Minerals and Energy), in partnership with the Swiss Agency for Development and Cooperation. The project is currently in its third phase and will run until the end of One of the achievements of the project, in partnership with the Government of Mongolia, has been to help develop a processing plant that does not use any mercury or cyanide in the gold recovery process. In 2008, the government passed temporary regulations to legalize the growing ASM sector, and in 2010 new regulations were permanently passed based on their experiences. These amendments defined ASM, provided for miners access to mining land, and income tax levels. Further to the amendments, the 30 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

35 Regulation on the Extraction of Minerals from Small Scale Mines was approved by Government of Mongolia in December EXPLORATION RADIOACTIVE MINERAL RESOURCES In 2013, radioactive mineral exploration activities were undertaken by 13 entities with a total of 67 exploration licenses covering 1,890,513 hectares. Two entities of them developed and submitted the reports on exploration result and mineral resource estimation based on qualified expert opinion OTHER MINERALS Article of the Minerals Law which was revised in July, 2014 specifies that the license holders shall pay for undertake exploration work each year with a value not less than the amounts specified below per hectare of the licence area: Article : 2nd-3th years of exploration license 0,5 USD; Article : 4th-6th years of exploration license 1,0 USD; Article : 7th-9th years of exploration license 1,5 USD. Article : 10th-12th years of exploration license 10 USD. The major exploration activities carried out in 2013 were:- Million MNT No Name of Company Types of Minerals Licence reference Area (hа) Estimate d Cost MNT m Actual Cost MNT 000 Cost per hectare MNT Tsagaan Uvuljuu coal MV , , Galaxy Mining Mongolia copper XV , , Enkh Tunkh Orchlon ХХК coal XV , , Shariin Gol JSC coal MV , , Khunnu Gobi Altai coal XV , , Khunnu Altai Minerals coal XV , , Oyu Tolgoi Copper, gold MV , , Sod gazar Molybdenum XV , , Mongolian National Rir Earth Rare earth elements MV , Etugen-Eye coal XV , , Total 274, , Table-15 Source: Information from Mineral Resource Authority of Mongolia 31 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

36 While exploration for coal and copper is still taking place, no further iron ore exploration activity is currently ongoing, since instead the industry is focused upon improving indigenous processing capacity OIL Exploration carried out in the blocks with PSA in 2012 No. Blocks with PSA Contractor Work to be performed Unit Volume of work performed 1 Khukhnuur XVIII NPI 2D seismic survey km 1,096 1 exploration well drilling km 2,350 2 Bayantumen XVII Magnai Trade 2D seismic survey km Dariganga XXIV Apexpro Investment 2D seismic survey km Tsagaan Els XIII Zuunbayan XIV Gobi Energy Partners Passive seismic survey Point force 210 2D seismic survey km exploration well drilling km 1,748 5 Tukhum X (south) Mongolyn Alt MAK Magnetic exploration km 2,000 2D seismic survey km Tariach XV Golden Sea Petroleum 2 exploration well drilling km 3,694 7 Tukhum X (north) Sansaryn Geologi Khaiguul 2D seismic survey km exploration well drilling km 1,320 8 Galba XI Zon Xen U Tian 4 exploration and evalutation well drilling km 4,296 Table Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

37 Exploration carried out in the blocks with PSA in 2013 No. Blocks with PSA Contractor Work to be performed Unit Volume of work performed 1 Khukhnuur XVIII NPI Parameter, drilling of 3 exploration wells km 5,313 2 Tukhum X (north) Mongolyn Alt MAK Magnetic exploration km 15,000 Geological surveys km 300 /1:200000/ 3 Sukhbaatar XXVII Wolf Petroleum 2D seismic survey km Bogd IV, Ongi V Cupcorp Mongolia 2D seismic survey km 235 Table PROCESSING Existing processing capacity for all minerals is as follows: Facility Resource processed Year online Beren Mining Beneficiation Plant Iron 2007 Focus Metal Wet Processing Plant Iron 2014 Altain Khuder Processing Plant Iron 2011 Tumurtei Iron Ore Concentrator Iron 2014 Darkhan Metallurgical Plant Iron 1994 Oyu Tolgoi Processing Plant Copper 2013 MMC Coal Handling and Preparation Plant Coal 2011 Table-18 In January 2014, Head of the Heavy Industry Policy Department (within the Ministry of Agriculture and Industry) Ganbold Dogsom announced that Sainshand Industrial Complex project would include a steelmaking and metallurgical facility, and would be completed by early Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

38 In August 2013, South Korean steelmaker POSCO announced a deal with the Mongolian Mining Corporation to develop a US$2 billion coal-to-liquids plant, a capacity that could reduce export costs and add value to its coal industry by providing a cleaner fuel. A similar partnership has been underway with German firm ThyssenKrupp since April It is also possible that coal-to-liquid facilities could meet Mongolia s medium-term diesel requirements whilst domestic oil extraction and refining facilities are under development. 3.2 OIL AND GAS OIL OVERVIEW Petroleum drilling and production, along with a small refining capacity, were the result of an historical initiative by the Soviet Union after the first discovery in However, the responsible company ceased its activities in 1969, variously citing a pressure decrease at the well, a fire at the refinery, and economic factors. After the collapse of the Soviet Union, the development of upstream petroleum operations recommenced and the Petroleum Law of Mongolia and the Petroleum Law of Regulations were both passed in The Government furthermore initiated the Petroleum Program that classified prospective petroleum areas into contract blocks and released them for international bidding. In 1993, the first Production Sharing Contract was signed with American exploration firm SOCO; and in 1997 a well in the Tamsag Basin in the east of the country recorded the first free-flowing oil. Shortly afterwards, oil began to be exported to China by truck. The map below shows the current distribution of oil producing and exploration blocks in Mongolia: 2 Sources: MineSight; Petro Matad Limited; Mongolian Mining Corporation; Oil and Oil Shale Mongolia Conference 2014; United States Energy Information Administration; United States Geological Survey; Mongolia Ministry of Mining; Genie Energy; Oxford Business Group; The UB Post; Business New Europe 34 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

39 The Petroleum Authority of Mongolia states that the country has proven reserves of 2.3 billion barrels, and estimates that it may contain 0.8 billion more. Between 2010 and 2013, Mongolia produced a total of 13.4 million barrels of oil. Mongolian crude oil exports in 2013 totalled $515 million, contributing 12% to the total value of exports OIL OPERATIONS AND EXPLORATION Of the thirteen different oil shale basins to have been identified in Mongolia, only two contain blocks that are currently producing on a commercial scale: i. Tamsag Basin In the Tamsag Basin, PetroChina Daqing Tamsag operates 2 blocks: XIX, which began producing in 1998; and XXI, which began producing in 2010 ii. South-East Gobi Desert Basin In the South East Gobi Basin, Sinopec operates Block PSC97, which was the first oil producing field from 1953 to It resumed production in 2007 and has exported 2.66 million barrels of oil as of 29 February Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

40 No Name Date PSA effective 1 Toson-Uul XIX GOM resoluti on Licence holder Companies 26-Apr PetroChina Daqing Tamsag ХIХ Included in Operator reconciliati Country on PRC Yes Exploitation 2 Tamsag XXI 07-Aug PetroChina Daqing PRC Yes Exploitation Tamsag ХХI 3 Zuun 19-Feb Dong Shing PRC Yes Exploitation Bayan1997PS A 4 Matad XX 19-Jul Petro Matad Mongolia Yes Exploration 5 Bogd IV 29-Jul Cupcorp Mongolia Cayman Yes Exploration Islands 6 Ongi V 29-Jul Cupcorp Mongolia Yes Exploration 7 Tariach XV 07-Mar Golden Sea Petroleum PRC No Exploration 8 Galba XI 20-May- 147 Zon Xen U Tian PRC Exploration Tsaidam XXVI 29-Jul Sansaryn Geologi Khaiguul No Exploration 10 Tukhum X (north) 29-Jul Sansaryn Geologi Khaiguul Mongolia No Exploration 11 Nomgon IX 07-Feb Sansaryn Geologi - no Exploration Khaiguul 12 Khukhnuur 29-Jul NPI PRC No Exploration XVIII 13 Nyalga XVI 20-Jun Shaman Recourse(Mongolia) Canada No Exploration 14 Tsagaan-Els XIII 15 Zuunbayan XIV 16 Sulinkheer XXIII 20-May May Gobi Energy Partners Switzerland Yes Exploration GmbH 148 Gobi Energy Partners Switzerland Yes Exploration 22-Jul Shunkhlai Energy Mongolia Yes Exploration 17 Borzon VII 29-Jul MCS Petro Limited Mongolia Yes Exploration 18 Bayantumen XVII 19 Dariganga XXIV 20 Tukhum-X (south) 21 Sukhbaatar XXVII 08-Dec Magnai Trade Mongolia Yes Exploration 09-Feb Apexpro PRC Yes Exploration 25-Jul Mongolyn Alt Mongolia Yes Exploration 05-Jan Wolf Petroleum Australia No Exploration Table Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

41 3.2.2 GAS No gas is currently extracted in Mongolia. In March 2014, the Korea Gas Corporation signed an agreement with state-owned Erdenes Tavan Tolgoi to cooperate in exploiting new energy sources PROCESSING Mongolia lacks indigenous capacity for processing oil: in 2013 Mongolia imported an estimated 11,000 barrels of oil products (largely gasoline and diesel) per day, and has been doing so at an average rate of 12,000 barrels a day since Mongolia is estimated to import 98% of its oil from Russia and receives the remainder from a domestic but Chinese-owned refining facility. In May 2013, Mongolia signed a deal with PetroChina to exchange crude oil drilled in Mongolia for more refined products processed in China. The imported oil will be of a superior quality to that currently received from Russian facilities. In June 2013, a Mongolian oil processing and trading company named HBOil JSC signed a deal with North Korea s Sungri oil refinery in order to reduce dependence on Russian and Chinese capacity. 3.3 PRODUCTION MINERALS Production of minerals over recent years is shown in the table below. Mineral Unit Coal Tonnes ,926 30,123 Copper concentrated at 35% Tonnes Molybdenum concentrate at 47% Tonnes ,050 3,869 Gold kg ,995 8,904 Tungsten Tonnes Tungsten concentrate Tonnes Iron Ore Tonnes ,561 6,011 Zinc concentrate Tonnes Tungsten concentrate Tonne Salt Tonne Source: National Statistical Bulletin 2013, Page 345 Table-20 3 Source: Mongolia Ministry of Mining 37 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

42 3.3.2 OIL Oil production in recent years has been:- Total Oil Production M i l l i o n s b a r r e l s Table Chart-11 xx Mongolia s oil demand is currently 60 70,000 barrels per month, of which about 98% is imported due to the absence of refining facilities in the country. Chart ECONOMIC CONTRIBUTION GROSS DOMESTIC PRODUCT AND GROSS INDUSTRIAL PRODUCT In April 2014, the share of mining in GDP in Mongolia stood at 20%, twice as much as one decade ago. Mongolia s economic growth rate is estimated at 12.5% in 2013, compared to 6.4% growth in Predictions are that GDP will continue to grow at a double-digit rate between 2014 and 2017, due in part to large mining projects coming online. 4 Sources: World Bank; United Nations Development Programme; International Monetary Fund 38 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

43 70.0% Chart Title 60.0% 50.0% 56.4% 62.7% 62.1% 61.9% 58.7% 58.7% 40.0% 30.0% % of GDP % of GIP 20.0% 20.2% 19.5% 22.7% 21.0% 18.0% 18.5% 10.0% 0.0% Chart-13 Source: National Statistical Bulletin pages 205, EXPORTS Coal made the following contributions to Mongolian exports in 2013: Export Weight (thousand tonnes) Export Value (US$ million) Percentage of Mineral Exports by Value Percentage of Total Exports by Value 18,188 1, Table-21 Copper made the following contribution to Mongolian exports in 2013: Export Weight (thousand tonnes) Export Value (US$ million) Percentage of Mineral Exports by Value Percentage of Total Exports by Value Iron ore made the following contribution to Mongolian exports in 2013: Table-22 Export Weight (thousand tonnes) Export Value (US$ million) Percentage of Mineral Exports by Value Percentage of Total Exports by Value 6, Table Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

44 Crude oil made the following contribution to Mongolian exports in 2013: Export Volume (thousand barrels) Export Value (US$ million) Percentage of Mineral Exports by Value Percentage of Total Exports by Value 5, Table-24 Source of tables 21-24: General Department of Custom and Mongol Bank The contribution of the mining sector over recent years is shown in this chart below. Source: Foreign Trade report of Central Bank Chart EMPLOYMENT According to information from the National Statistical Office, 50,300 people were employed in the mining industry in 2013 out of a total of 1,103,600 people employed throughout Mongolia. The figures for employment in the mining industry are assumed to exclude the artisanal and small scale mining sector. 40 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

45 Employment over recent years is shown in Chart 15 below. Chart-15 In 2013, 181 out of 250 participating companies submitted information of their employee number. These numbers of 181 companies are covering about 50 percent of the employees in the mining sector. See the related information in Appendix GOVERNMENT INSTITUTIONS MONGOLIAN TAX AUTHORITY As stipulated in the General Law of Taxation, the Mongolian National Tax Administration comprises the General Department of Taxation, tax offices of the aimags, the capital city, and the districts, and the state tax inspectors in soums. The Authority is responsible for: Organizing and implementing tax legislation; providing taxpayers with information and advice, and conducting training and outreach Supervising compliance with tax legislation Collecting revenue for state and local budgets According to its website, the Tax Authority is currently midway through a five-year programme to reach the world taxation standard. The goals of the Development of the National Tax Administration 5 Sources: Integrated Financial Services; Mongolian Tax Authority; Mongolian Customs Office; Asian Development Bank; International Labour Organization; Sodon Vision; Petroleum Authority of Mongolia; Mongolia State Property Committee; news.mn; The Nautilus Institute; Mongolia Ministry of Energy; Mongolia Mineral Resource Authority; Herbert Smith Freehills 41 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

46 Programme include creating the legal environment for an effective knowledge- and green-based economy, to develop tax administration based on information technology innovations, and to introduce international experience and instruments to develop risk management techniques and to audit risky taxpayers MONGOLIAN CUSTOMS OFFICE The Mongolian Customs Office is in the process of expanding its remit from the traditional role of collecting duties and taxes for the benefit of the state budget to including special roles of upholding social wellbeing, and to ensuring Mongolian economic security. Under a programme assisted by the Asian Development Bank and the Government of South Korea, the Office is current reforming itself from an administration organisation into a service provider. Key objectives include creating an efficient channel for clients to address any difficulties that they have encountered in cross-border trade bureaucracy GENERAL ORGANISATION FOR SOCIAL INSURANCE The General Organisation of National Social Insurance was created by the Law of Mongolia on Social Insurance in May 1994, and consists of a central Board and local branches and units. The purpose of the Organisation is to administer pension, health, benefit, industrial accident, and unemployment insurance PETROLEUM AUTHORITY OF MONGOLIA The objective of the Petroleum Authority of Mongolia is to inform and assist government policies to support the development of the oil industry and encourage investment. The Authority aims to provide clients with an effective and fair service. The current priorities of the Authority include implementing policies of oil extraction and refining, support conventional and non-conventional oil exploration activities, and increasing processing capacity. The Authority presently has seven separate divisions and departments working towards these objectives: administration, exploration, monitoring and evaluation, exploitation, procurement, technology, and finance and investment STATE PROPERTY COMMITTEE The State Property Committee is the owner of over 100 companies and entities which are owned or majority-owned by the Mongolian state MINISTRY OF MINING THE MINERAL RESOURCE AUTHORITY The Authority is a government agency within the Ministry of Mining that holds responsibility for processing licence applications and issuing exploration and mining licences. Under the 2006 Minerals Law and amendments passed in 2014, the Government agency (MRAM) shall refuse the request and 42 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

47 give a written notice to the applicant if the application fail to meet the requirements of article of the law (where exploration and mining are not either restricted or prohibited, no part of the requested exploration area may overlap with a reserve area or a special purpose territory; no part of the requested exploration area may overlap with an existing licensed area or the licensed area covered by a pending application), notify the request to the Governors of Aimag and Capital city where the requested area located if the requested area is available for issuing an exploration license to respond in 30 days with Citizens Representatives Hural of the soum or district and aimag or capital city. Failure to respond as set forth in this Article shall be deemed as approval. The Authority s other tasks can be summarised as follows: To support the government administration in formulating development policies by providing the necessary information and creating a favourable environment in which to implement policy guidelines and increase investment in this sector. To provide services related to exploration and mining special permits in order to implement the relevant legislation, including the Minerals Law and the Licensing Law THE MINERAL RESOURCES COUNCIL The Council is responsible for registering and archiving the mineral reserves of Mongolia as determined by the results of exploration activity in a licensed area MINISTRY OF ENVIRONMENT AND GREEN DEVELOPMENT The Ministry is responsible for receiving and reviewing the environmental protection plan that exploration licence holders are required to submit within 30 days of receiving their licence. Furthermore, the Ministry is responsible for holding the amount equal to 50% of companies environmental protection budgets for each particular year in order to secure their compliance with their respective environmental protection plans. These funds may be used by the Ministry if it believes that the licence-holder has failed to fully implement its environment protection plan MINISTRY OF LABOUR The Ministry of Labor is responsible for labor engagement and poverty reduction, improvement of working conditions and living cost issues, foreign nationals employment within Mongolian territory and export of labor force. The Ministry aims to develop and implement policies to promote employment, to facilitate decent working environment, to develop human resources through skill and professional development, improved competitiveness and flexibility, to improve quality employment services, and to promote small and medium enterprises. The Ministry operates with seven departments: State administration department, Employment policy implementation coordination department, Employment relations policy coordination department, SME development department, Vocational Education and Training Authority, Monitoring, evaluation and internal auditing department, finance and Fund policy and planning department. The Ministry also has its sub-offices in all districts of the capital city and aimags. 43 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

48 There are four Government Implementing agencies working under the Ministry which include: Labor Exchange Central Office, Centre for Employment Service, Labor Research Institute, National Research Centre for Occupational Health and Small and Medium Enterprises Development Fund NUCLEAR ENERGY AGENCY In compliance with the Government resolution on Forming regulatory and executor agency of the government, the Nuclear Energy Agency performs its duties under the Prime Minister as a regulatory agency of Mongolian Government. The Agency is responsible for utilization of nuclear energy, introducing of nuclear technology, coordinating scientific research on nuclear energy in the context of State policy of Mongolia, regulatory review and assessment concerning nuclear and radioactive safety and security. The Agency operates with three departments: an administration department, a nuclear technology department; and a Nuclear and radiation regulatory department. The agency has duty to implement the following main activities: To implement state policy on exploitation of radioactive minerals and nuclear energy, utilization of nuclear technology and ensuring nuclear and radiation protection, and safety, and control; To organize activities of processing of radioactive minerals; To use of radioactive minerals and nuclear energy and utilization of nuclear technology; To ensure nuclear and radiation safety and take measures to have revealed violations that eliminated HUMAN DEVELOPMENT FUND The State Great Khural approved the Human Development Fund Law on 18 November 2009 to establish an incremental fund which generates mining sector revenues and distribute fair share to the citizens (the fund will be closed as the Resources Fund is established). Between 2010 and 2012, a total of MNT billion of revenue was generated in the Human Development Fund and MNT 1,867.0 billion was disbursed in order to ensure the provision of 1.5 million togrogs for every citizen as specified in the Action Plan of the Government of Mongolia for (shares have been distributed to the citizens in cash or in kind) SOCIAL SECURITY FUND 44 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

49 On 31, May in 1994, the Social Security law was passed. The law defines the types of social insurance, payment of insurance premiums, the accumulation of the fund, and sets out the legal basis for social insurance registration and the inspectorates' action. In accordance with the article 12.1 of this law the Social Insurance Fund s income and expenditure budget approved by Parliament each year Social Insurance Fund revenue sources are as follows: Social insurance premiums paid by the insured; Social security fee paid by employers; Fund interest rate on bank deposits, income from securities trading; Penalties imposed Undue loss of Social security payments, State budget allocations; Other sources. The Social Security Fund shall be used in accordance with the procedures set forth in the legislation for the following purposes: 1. Pensions and grants; 2. Social Insurance Agency, National Council on operating expenses; 3. The legislation referred to other fees and expenses; 4. Earmarked funds to buy government bonds and securities issued by the Bank of Mongolia, and can be increased by placing a commercial bank; 5. Fund to buy government bonds, securities of the bank capital in the annual budgets of the social insurance fund, approved by Parliament. 3.6 STATE OWNED ENTERPRISES STATE OWNED ENTERPRISES IN THE MINING SECTOR The State Property Committee records that there are 99 legally registered enterprises with state participation, comprising Joint stock companies 100% state ownership 47 State owned limited liability companies 7 State owned ventures 25 6 Sources: United States Geological Survey; Financial Times; Mongolia Growth Group; Mining Journal; Eurasia Capital; Mongolia EITI Report Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

50 Enterprises with state participation 4 Joint ventures 5 Other enterprises 11 Total 99 Table-25 These figures do not include locally owned enterprises. State owned and locally owned mining companies are as follows: No. Company name Type of property Mineral Location Locally-owned 1 Erdenes Mongol 2 Erdenes Tavan Tolgoi JSC GOM owns 100% Brown coal Ulaanbaatar Erdenes Mongol owns 100% Coal Ulaanbaatar 3 Erdenea Oyu Tolgoi Erdenes Mongol owns 100% 3 Baganuur JSC Erdenes Mongol owns 75%, Mongolian National Coal Corporation 21% amd others 4% 4 Shivee-Ovoo JSC Erdenes Mongol owns 90%, others 10% 5 Erdenet Mining Corporation JV 6 Mongolrostsvetmet JV Erdenes Mongol 51%, Government of Russian Federation 49% GOM 49%, Government of Russian Federation 51% 7 Oyu Tolgoi Erdenes Oyun Tolgoi 34%, Canada 66% 8 Darkhan Metallurgical Plant State-owned Copper and Gold Coal Coal Copper, Molybdenum Gold, fluorite, Coal adnsilver Copper, Gold Ulaanbaatar Ulaanbaatar Govisumber Orkhon Ulaanbaatar Ulaanbaatar GOM owns 100% Iron Ore Darkhan Uul 1 Tavantolgoi JSC Local property 51%, private property 49% 2 Mogoin Gol JSC Local property 48%, private property 52% 3 Bayanteeg JSC Local property 70%, private property 30% Coal Coal Coal Umnugobi aimag Khuvsgul aimag Uvurkanhai aimag Table Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

51 ERDENES MONGOL (100% STATE OWNED) Erdenes Mongol is the largest state-owned mining company in Mongolia, and was established for the purpose of representing the Government of Mongolia in the ownership and development of strategically important mineral deposits in Mongolia Establishment basis of Erdenes Mongol State Great Khural (Parliament) resolution No.27 covers certain deposits as strategically important deposit in order to use natural resources wisely and efficiently. In consistent of this resolution the Parliament introduce the Human Development Fund Law in 2009 to mobilize those strategically important deposits and facilitate the country s social and economic development through increasing the state s wealth by use of natural resources and distribute fair share to the citizens. According to the law, state owned legal entity shall implement ownership right of the state share in legal entities that hold mining licenses of strategically important deposits. Erdenes Mongol (Erdenes MGL ) was established in accordance with the Government resolution No.266 (15 November 2006) and the State Property Committee resolution No.52 (22 February 2007). The company was restructured in 2010 as per the Human Development Fund Law article 8.2 which specifies state owned legal entity shall implement ownership right of the state share in legal entities that hold mining licenses of strategically important deposits. The company s charter was revised and approved as per the Government resolution No.347 dated 12 October Pursuant to the Erdenes Mongol charter, the company operates its business in compliance with the Constitutional Law of Mongolia, Civil Law, Human Development Fund Law, Company Law, Minerals Law, and Nuclear Energy Law, International treaties and other relevant legal acts and the Company charter. For the Company charter, please refer to the following link: 47 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

52 Organizational chart The Erdenes Mongol group comprises the Erdenes Mongol Corporation and 5 subsidiary companies:- Baganuur JSC Erdenes Tavan Tolgoi JSC Erdenes Oyu Tolgoi Shivee Ovoo JSC Erdenet Mining Corporation Oyu Tolgoi Please refer to Appendix 15 for Board composition of parent and subsidiary companies and state/locally owned enterprises Financial Flows There are 11 state owned or state participated enterprises are included the total 250 companies covered in the reconciliation report, thereof 5 enterprises paid dividends to the state and local budgets in Payments are set out in the table below: No. Company Name Amount State budget Thereof 1 Bayanteeg JSC Darkhan Metallurgical Plant JSC 2,129 2,129-3 Mogoin Gol Tavan Tolgoi 7,799-7,799 5 Erdenet 68,300 68,300-6 Total 78,246 70,429 7,817 (in million MNT) Local budget Table Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

53 ERDENES OYU TOLGOI (ERDENES MONGOL OWNS 34%) Erdenes Mongol held the 34% government shareholding of Oyu Tolgoi (OT) as a result of the Investment Agreement on joint development of the OT copper-gold deposit made on 6 October 2009 and it was guaranteed by signature of the Shareholder s Agreement. Erdenes Mongol set up a subsidiary - Erdenes OT - and transferred its 34% shareholding of the OT to the new subsidiary in As part of the OT project, a concentrator that has the capacity to process 100,000 tonnes of ore per day was put into operation in December 2012 and started to export copper concentrate. An OT underground mine is expected to be put into operation in 2016 and once it is put in operation it will be one of the 5 word-class copper mines and produce 24% copper supply in Asia ERDENES TAVAN TOLGOI JSC (ERDENES MONGOL OWNS 100%) Erdenes Mongol set up its subsidiary - Erdenes Tavan Tolgoi (TT) - to develop a strategic coal deposit- Tavan Tolgoi and the latter started up in August Erdenes TT started to export coal to the People s Republic of China ( PRC ) in August 2011 and since January 2012 it has worked with a contract mining operator-macmahon Holdings Limited, Australia, in the East Tsankhi tenement, TT coal deposit. The Tavan Tolgoi coal project requires billions of dollars of investment and shares of Erdenes Tavan Tologi will be sold on the open market to raise funds SHIVEE OVOO JSC (90% ERDENES MONGOL OWNED) Shivee Ovoo started up at the Shivee Ovoo brown coal deposit located in Gobi Sumber aimag in 1990 and was restructured as a joint stock company on 22 September % shareholding of Shivee Ovoo is owned by the Government and other 10% shareholding by other shareholders. The government shareholding of Shivee Ovoo was transferred to Erdenes Mongol pursuant to Mongolia s Government resolution # 100 issued on 16 March 2013, and it became a subsidiary of Erdenes Mongol ERDENET MINING CORPORATION (ERDENES MONGOL OWNS 51%) Erdenet Plant is a major molybdenum mining and ore-dressing plant in Asia set up in 1978 under a Mongolian-Russian Intergovernmental Agreement based on the Erdenet Hill. It processes about 26 million tons of ore and produces about 5.3 thousand tons of copper and about 4.5 thousand tons of molybdenum per year. 49% Shareholding Company is owned by the Russian Federation Government and 51% by Mongolia s Government respectively and pursuant to Mongolia s Government resolution # 49 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

54 100 issued on 16 March 2013, it was decided to transfer the Mongolia shareholding of Erdenet Plant to Erdenes Mongol. It is responsible for representing the Mongolian government in both of the country s major copper projects BAGANUUR JSC (ERDENES MONGOL 75%) Baganuur was set up to supply coal for thermal power plants that are part of the central grid in 1978 and has been operation for 35 years. The government shareholding of Baganuur was transferred to Erdenes Mongol pursuant to Mongolia s Government resolution #100 issued on 16 March 2013 and Baganuur became a subsidiary of Erdenes Mongol MONGOLROSTSVETMET JV (ERDENES MONGOL 49% STATE OWNED) MongolRostsvetmet is a leading fluorspar mining and production company in Mongolia. Hentii aimag has several operating fluorspar mines owned by MongolRostsvetment. MongolRostsvetmet produces both acid & metallurgical grade fluorspar concentrates. The mines ship a total of 120,000 tpa of concentrate (90-95% purity) to Russia for use in the chemical industry DARKHAN METALLURGICAL PLANT (100% STATE OWNED) The Darkhan metallurgical plant owns the licence of the Selenge iron ore deposit, which has 230 million tonnes of reserves and is listed as a strategic deposit. Earlier, the licence was held by a little known Chinese company, BLT, which mined significant amounts of first-grade ore. Darkhan metallurgical plant state-owned company intends to become a metallurgy and mining complex. In a scope of the plan, it intends to commission a new wet-concentrate processing magnetic plant within this year. A construction work has completed TAVANTOLGOI JSC (51% LOCAL OWNED) TT was founded in May 1967, and on 05 December 1994 the mine became a state property dominated Tavan Tolgoi JSC by the meeting of the Committee under the Government Resolution # MOGOIN GOL JSC (48% LOCAL OWNED) Mongoin Gol coal mine located in Tsetserleg soum of Hovsgol province, 223 km south-west of the Murun city. 48% of Local owned Mogoin Gol JV uses its 10% of output capacity and works seasonally. It sells more than 10 thousand tonnes of coal per year. Mogoin Gol covers hectares in MV No exploitation licence and hectares in the XV exploration licences. By 2009, it had 2,207.9 million tons of prepared use of resources, and inferred 11,441.6 million tonnes of estimated resources. 50 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

55 BAYANTEEG JSC (70% LOCAL OWNED) Bayanteeg coal mining settlement in Nariinteel sum of Uvurkhangai province in southern Mongolia. Founded in 1962 with capacity of 25.0 thousand tonnes of coal output per year and estimated reserves at 29.6 million tonnes on transferred industrial rate by the detailed survey performed in In 1995, it became a locally owned company ", Bayanteeg" JSC. Since its inception 50 years ago, 5,961 thousand m3 of soil removed, 4,861 thousand tons of coal have been extracted and sold. Currently it supplies 55 65,000 tonnes of coal per year to Uvurhangai, Bayanhonger, Arkhangai province for providing coal usage CORPORATE GOVERNANCE EVALUATION SURVEY OF STATE OWNED COMPANIES The Ministry of Mining and the Open Society Forum conducted a corporate governance evaluation survey of state owned mining companies between May to August The survey covered 9 state owned mining companies and concluded that although there have been considerable improvement in terms of legislation framework on corporate governance in the country, the average score of the companies involved in the survey did not exceed the average expectation. The majority of the companies were scored only one third of the total score which they supposed to achieve. Only Oyu Tolgoi was ranked at 48 out of 100. The results are 1.5 to 2.5 times lower than companies operating in other developing countries, including Vietnam, Thailand the Philippines, where the corporate governance scores range between 48 to 77 points. Transparency of information, conduct of significant agreements, and implementation of shareholders right and board of directors activities were identified as the most problematic indicators. The evaluation results are set out in the chart below, prepared by the Open Society Forum:- Corporate governance evaluation Full score Monatom Monrostsvetmet Oyu Tolgoi Erdenes Oyu Tolgoi Erdenes TT Erdenet Shivee Ovoo JSC Baganuur JSC Erdenes MGL Chart Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

56 3.6.2 STATE PARTICIPATION IN THE OIL SECTOR Since the Law of Petroleum was passed, Mongolia s economy has expanded and oil industry has developed rapidly. The law of petroleum has not been amended since 1991, but the Tax law has changed several times. So, there are some inconsistent provisions in obsolete laws. The law of Petroleum has been completely updated to comply with government policy on the minerals sector and to facilitate investor participation in the sector. Parliament approved the new law on 1st July Once the law has been passed: Coordination and functions of government agencies in the oil industry were systematized; previously, these had not been clearly set out. Article 6 of this Law and the article 7 of the State Great Khural clearly specify the Government participation. Investors have been faced with bureaucracy and time consuming actions. This law reduced bureaucracy and regulated the time of responding to any contractors' requests and clarified and made stable the legal framework. VAT and customs duties are to be paid in first five Exploration years. The obligation of recoverable cost reviewing and approving functions are transferred to state audit There was no clear regulation on non-conventional oil products. It was treated either as a solid mineral, or as oil. So, it was not clear where to get licences and which law applied to it. The new law creates a legal framework for putting the non-conventional oil, coal-bed methane, oil shale resources into economic cycle and explore and determine the reserve. 3.7 BUDGET PROCESSES STATE FINANCIAL SYSTEM The Mongolian National budget consists of State budget, Local budget, Human Development Fund budget and Social Security Fund budget 7 Sources: Mongolia Ministry of Finance; European Bank for Reconstruction and Development; BLP Law; International Monetary Fund; Mining Journal; DLA Piper; International Tax Dialogue; Oil & Gas Journal 52 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

57 The central budget is a budget that is approved by the State Great Khurals for the collection and expenditure of the Government. The local budget is a budget that is approved by the Representatives Khurals for the collection and expenditure of the governors of aimag, capital city, soum and district. The Local budget consists of the budgets of the aimag, the capital city, the soum and the district. The Human Development Fund is described in Section above and also in Section 3.8 (Distribution of Revenues). The Social Security Fund is described in Section above. Budget revenue consists of revenue of the stabilization fund and equilibrated revenue. The equilibrated revenue consists of current revenue, capital revenue and grants. The current revenue consists of the tax revenue and non-tax revenue. The tax revenue includes income taxes, social contributions, taxes on property, taxes on domestic goods and services, taxes on foreign trade and other taxes. The non-tax revenue includes dividends from state partially owned enterprises with state shares, interest and fines, revenue from rent, own revenue of budget and other non-tax revenue BUDGET LEGISLATION Mongolian National budget policy is regulated in accordance within the legal framework outlined below THE FISCAL STABILITY LAW OF MONGOLIA, 2010 In June 2010, the Parliament of Mongolia passed the Fiscal Stability Law to ensure that the country s mineral resources were exploited in line with sustainable growth and low inflation. The Law has two principle components: It establishes quantifiable constraints on the future permitted structural deficit, permitted levels of debt, expenditure growth, and the processes used to estimate budget revenue: The net present value of government debt must be no more than 40% of nominal domestic product of the particular year Total budget expenditure growth rate for each year shall not be more than the greatest of the non-mineral growth rate of the particular year and the average of non-mineral growth rate for the 12 consecutive years preceding the particular year The structural deficit is limited to 2% from 2013 onwards It establishes the importance of the Medium Term Fiscal Framework, a fiscal policy document that must be produced each year. The Framework should contain the government s fiscal objectives, its expected budget execution, and macroeconomic (employment rates, consumer price index, etc.) and fiscal projections (budget balance, public investment, etc.) for the next three years. 53 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

58 BUDGET LAW The purpose of this Law is to establish principles, systems, composition and classification of the budget, to implement special fiscal requirements, to define authorities, roles and responsibilities of bodies that participate in the budget process, and to regulate relations that rise in connection with budget preparation, budget approval, spending, accounting, reporting and auditing GOVERNMENT FUNDS ACT The purpose of this law is to outline the type of government special funds and to regulate relations with respect to building up, spending, reporting of performance and monitoring of these funds. 3.8 REVENUE ALLOCATION GENERAL The Budget Law (2011) clearly specifies the allocation of extractive revenue generated from mineral resources royalty, mineral exploration and mining licence fee oil resources royalty oil exploration and mining license fee However, allocation of mining revenue cannot be illustrated separately as the National budget revenue is allocated in total and the contribution from the extractive sector is in many cases not identified. The allocation of fees and revenues generated from extractive industry in accordance with the amended Budget law (2011) is shown below: Fees generated to the National budget from extractive industry Mineral resources royalty Human Dev. Fund State budget General Local Dev. Fund Aimag, apital city Soum, district HDFL 3.2.2; 70% 25% 5% Budget Law Certain part of prepayment and / or loan received to use strategically important mineral deposits. HDFL -ын Certain part Oil exploration and mining licence fee Budget Law: ; % 30% 54 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

59 Revenue from sales of shares, dividends to the State property from legal entities that own mining license of strategically important mineral deposit s, HDFL -ын Parts to be paid to the Government Oil resources royalty Budget Law: ; ; Source: 70% 20% 10% Table HUMAN DEVELOPMENT FUND GENERAL The State Great Khural approved the Human Development Fund Law on 18 November 2009 to establish an incremental fund which generates mining sector revenues and distribute fair share to the citizens (the fund will be closed as the Resources Fund is established). HDF s revenue is drawn from the following sources: a. Dividend from license holders who exploits in the area of strategic important mineral deposit in accordance with the HDFL Article b. 70% of minerals royalty paid by legal entities operate mining and production in mineral deposits, allocated to the state budget in accordance with the HDFL Article c. Investment which is specified in article 5.1 of this the HDF Law d. Some part of Advances and Loans on Royalty of Deposits of strategic importance Between 2010 and 2012, a total of MNT billion of revenue was generated in the Human Development Fund and MNT 1,867.0 billion was disbursed in order to ensure the provision of 1.5 million tugruks for every citizen as specified in the Action Plan of the Government of Mongolia for (shares have been distributed to the citizens in cash or in kind) ALLOCATION FROM 2013 BUDGET TO HUMAN DEVELOPMENT FUND Allocations in 2013 to the Fund were made as follows:- i. MNT 70.0 billion a dividend from Erdenet operation for year 2012 in accordance with the HDFL Article ii. MNT billion - part of the minerals royalty paid by legal entities operate in the mining sector was allocated to the state budget iii. In accordance with the HDFL Article Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

60 iv. MNT billion further to the Government s instruction issued on 29 September 2012, the budget proposal indicated that this amount would be generated from incremental resources royalty as a result of amendment to the investment agreement of Oyu Tolgoi. However, the budget for royalty income to be allocated to HDF was reduced by MNT million due to a profit decrease of Erdenet and delay in amendment of Oyu Tolgoi investment agreement. These were mainly caused by drop in price and physical amount of copper/coal, the main mining products (physical amount of coal by 2.1 million tons; sales of gold by 2.8 tons), in accordance with the revised Budget law. No. Revenue items Initial budget Revised budget Actual Difference 1 Revenue from dividend and sales of shares (as per HDFL Article 3.2.1) Part of minerals royalty to be allocated to the state budget (as per HDFL Article 3.2.2) (4.3) 3 Prepayments (as per HDFL Article 3.2.4) Bank interest income Total revenue (4.1) GENERAL LOCAL DEVELOPMENT FUND (GLDF) Table-29 The Budget Law of Mongolia specifies that A particular level s general budget governor shall have a Local Development Fund aimed at supporting local development (60.1); Governors of baghs and khoroos shall conduct an open survey and questionnaire on investments, programs, projects and activities to be implemented by the LDF in their bagh and khoroo, and the sequence and means for implementing them (63.1); and based on the survey and questionnaire, aimags and the capital city shall reallocate not less than 60 percent of transfers allocated from the GLDF to soum and district Development Funds taking into consideration indicators defined in Provision 59.3 of this Law (59.2) 5% of mineral royalty income amounts to MNT 28.3 billion were budgeted for LDFs in 2013; however in accordance with the revised budget law, the amount was decreased by MNT 4.8 billion. Indicators specified in Article 59.3 of the Budget Law are considered for defining transfers from the GLDF to the local budget in the fiscal year: As per the state budget audit report, revenue generated from mining sector in 2013 reached to MNT 1,147.0 billion; and increased by MNT billion or 29.2% compared to the previous year. This revenue constitutes over 20% of the total state budget revenue. Please refer to the link below for information on the State budget amendment for 2013: 56 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

61 3.9 ACTION PLAN FOR THE MINING SECTOR The Mongolian Government's Action Plan for sets out policies aimed at development of the mining industry, including: Support the policy to sustainably develop the mining sector through an annual increase in the budget for territorial geological mapping, explorations and prospecting, enriching the geological database, and increasing the reserve of the minerals; Cover 40% of the total territory by 2016 in the 1: scale geological map and general exploration work funded by the National budget with the purposes of prospecting the territorial geological formations, the distribution characteristics of mineral elements and their future prospects; Further moderate the organizational structure of the geological sector in framework of efforts and establish a new Mongolian National Geology Department Develop further the legal framework of minerals sector All work related to minerals exports will be done through a One window policy Provide a legal framework for national enterprises as subcontractors to supply goods and services to the ongoing mining project. Renew the list of strategically important deposits and intensify the processes to put the large deposits into economic circulation. Consolidate the state ownership of strategically important deposits in line with a corporate structure, and in accordance with provisions of the Law on Human Development Fund, provide citizens with preferred shares Undertake transparency of gold production, storage and sale Further elaborate the regulations to extract minerals through micro mining processes and improve the control on enforcements Facilitate application of principles and standards of The Extractive Industries Transparency Initiative and The Responsible Mining Initiative. Ensure compliance with the Law to Prohibit Mineral Exploration and Mining Operations at River Headwaters, Protected Zones of Water Reservoirs and Forested Areas, and develop environmentally friendly mining; Renew the economic statistical data of natural resources, and establish a system that allows competent authorities to collaborate on a systemized assessment methodology to assess he impacts of the minerals industry on the country s economic and financial sectors Formulate a policy for reducing export of minerals in raw material as well as enhancing the level of processing of exporting mining products in meet international standard requirement in step by 57 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

62 step and increasing the export of value added products due to provide stability of economic development Establish a modern technology of metallurgical complex based on Darkhan-Selenge region's iron ore Work with foreign direct investors under a principle of mutual benefit, and make amendment by mutual agreement with investors to existing stability agreements, product sharing agreements and investing agreements in the mining, power and oil sectors Parliament should organize the sale of the government s shares in Tavan Tolgoi on the internal and external stock exchange Ensure transparency of licence trading Support the introduction of environmentally friendly and best technology; complete identification work of damaged areas, and enforce rehabilitation by the responsible party. Rehabilitation costs will be placed in National budget account in advance. Formulate a policy to add value to mineral sector raw materials, and to allow export of only semiprocessed and final products Economic policy priority is reducing the economic dependency from mining sector, ensuring longterm sustainability and build up diversified economy with ability of competitive. A number of activities to improve in Minerals sector have already been undertaken, for example:- The Mongolian State Ikh Khural approved the decree No 18 for State Minerals Policy on 16 January A new Petroleum Law has been passed. The Minerals Law has been amended LICENSING REGIME MINING LEGISLATION Mongolian Minerals Law, 2006 In July 2006, the Parliament of Mongolia passed the current Minerals Law applicable to all type of mineral resources except water, oil, natural gas, and radioactive minerals, and provides the basis for all terms and processes associated with investing in Mongolian natural resources. 8 Sources: Herbert Smith Freehills; Hogan Lovells 58 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

63 Mineral licence holders have an exclusive right to explore and mine for minerals within their licence area, excluding water, petroleum, natural gas and radioactive minerals. Mining licences are granted for an initial term of 20 years and may be extended twice for terms of 10 years each. Depending on the amount to be invested, a mining licence holder is entitled to enter into Investment Agreement with the Government of Mongolia for between 10 and 30 years. The Agreement will provide the investor with a stable operational environment that includes the stabilisation of rates for corporate income tax, customs duty, value added tax, minerals royalties, and other operational requirements. If an exploration licence holder establishes and registers a mineral reserve within their licence area, they may enter into a pre-mining agreement that provides them an additional three years to complete feasibility studies and mine development plans, to obtain a mining licence, and to commence production Amendment Law 2014 In July 2014 the Parliament of Mongolia passed the Law of Mongolia on Amending the Minerals Law, which introduced 13 new provisions and altered a number more of existing provisions. These included: Creating a National Geological Survey and a Policy Council to oversee legal changes in the mining industry Lifting a 2010 ban on new exploration licences to increase the area of Mongolia open to exploration and mining from 8% to 20% Extending the maximum term of an exploration licence from 9 to 12 years and removing the requirement for a pre-mining agreement Law of Mongolia on Licensing, 2001 In February 2001, the Parliament of Mongolia passed the Licensing Law in order to define and regulate the process of applying for mineral exploration and mining licences. In addition to receiving approval from the Mineral Resource Authority approval, each exploration licence and mining licence must be approved by the governor of the province where the licence is located. The Law defined the roles and responsibilities of local administrations, self-governing bodies, and state inspection offices for geology and mining in monitoring the compliance of licence holders. An exploration or mining licence may be granted only to a limited liability company or joint stock company organized under the laws of Mongolia. A Mongolian citizen, or a foreign citizen is not permitted to be the registered holder of a minerals licence 59 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

64 The Land Law of Mongolia, 2002 In June 2002, the Parliament of Mongolia passed the Land Law to provide for three different types of land rights and their respective availabilities to non-mongolian individuals and organisations. Foreign organisations, foreign citizens, and Mongolian organisations with more than 25% of paidup capital from foreign sources, may not own or possess land, but may only use it. Land use rights must be approved by the relevant governor. The fees will vary as each province s representatives meeting (a meeting of elected officials) has the right to declare the applicable fee RADIOACTIVE MINERALS Nuclear Energy Law Article 18.9 provides that The State Administrative Body shall review the application and other relevant documents and shall make decision on issuance of a licence to conduct activities specified in Articles , and of this Law within 6-12 months and a license to conducts activities specified in Articles and within 1-3 months considering the specific characteristics of the activity. The President issued an order No.181 on 7 September 2011 that a decision on radioactive minerals licensing should be made after consideration by the National Security Council meeting. So in accordance with the Presidential order, the issue of radioactive minerals exploration/exploitation license is decided after approval in a National Security Council meeting. The agency is currently developing new registration system/software and will publish license information on its website once the software is developed. The information will be detailed information on radioactive minerals licenses and the agency will receive applications for new licenses, extensions, partial or full returns of license; and exploration report and plan online OVERVIEW OF LICENCES IN ISSUE GENERAL Exploration licence holders are afforded the exclusive right to exploration for minerals within the boundaries of the licence area for the duration of the licence; the exclusive right to obtain a mining licence for any part of the area covered by the exploration licence. Annual licence fees begin at US$0.10 per hectare in the first year and gradually increase across the period of the term of the licence. Holders are required to spend a certain minimum amount on exploration activities from the second year of the licence onwards. Applicants for a minerals exploration licence must file their request with the Mineral Resources Authority. The Authority is required to verify within 20 business days whether there are any reasons why the licence may not be granted. If the requested area is available for an exploration licence, the Authority notifies the Governor of the province where the requested area, who must give their opinion within 30 days of receiving the notification if they fail to do so, they are deemed as having agreed to 60 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

65 proposed issue of the minerals exploration licence for the requested area. After the Governor provides a positive opinion (or no opinion at all), the licence can be awarded. Mineral licence holders have an exclusive right to explore and mine for minerals within their licence area (excluding water, petroleum, natural gas and radioactive minerals). Mining licences are granted for an initial term of 30 years and may be extended twice for terms of 20 years each. Accordingly, the maximum period for a mining licence is 70 years. Holders of an exploration licence have an exclusive right to apply for a mining licence for all or part of their exploration licence area. Mineral reserves are determined through the results of the exploration activities performed in such a requested area and must be registered with the Minerals Resources Council, and an environmental impact assessment must be completed. Applicants must file their request with the State Administrative body in charge of mining (MRAM), which must verify whether the proposed area overlaps with any other unavailable for mining, and whether the amount and assessment of the minerals reserves determined from of the exploration activities is sufficient to justify the ecological damage. Before operations begin, the exploration licence holder may enter into a pre-mining agreement with the State Administrative body in charge of mining MRAM that provides three further years for feasibility studies and development plans, to apply for and obtain a mining licence, and to commence production from the deposit. This provision has been updated by a new law that passed in July, OVERVIEW OF THE EXISTING LICENCES Table 30 shows a summary of the licences in issue in Quantity of Entity s Quantity of Licenses Exploitation Of which Exploration Radioactive minerals Other minerals 1,660 3,029 1,300 1,729 Oil Total 1,691 3,118 1,303 1,815 Table-30 Further details on the entities holding licences are set out in Appendix 13 A, B, C and D The number of licences in issue over recent years is summarised in Chart 17 below. 61 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

66 7,000 5,913 6, ,955 1,042 4,315 5,357 4,436 1,020 3,416 1,091 4,111 5,202 1,085 3,659 4,744 1,158 2,979 4,137 3,770 3,540 1,198 1,237 2,572 2,303 1,303 1,815 3,118 5,000 4,000 3,000 2,000 1, Exploration Mining Total Chart-17 Table 31 analyses the licences in issue by geographical region. Aimags Numbers of License Area /ha/ Total area Exploitation Exploration Total Exploitation Exploration Total Arkhangai , , , % Bayan-Ulgii , , , % Bayankhongor , , , % Bulgan , , , % Gobi-Altai , ,005, ,009, % Gobisumber , , , % Darkhan Uul , , , % Dornogobi , ,367, ,435, % Dornod , , , % Dundgobi , , ,031, % Zavkhan , , , % Uvurhangai , , , % Umnugobi , ,533, ,982, % Sukhbaatar , ,817, ,847, % Selenge , , , % Tuv , , , % Uvs , , , % Khovd , , , % Khubsgul , , , % Khentii , , , % Дүн , ,033, ,947, % Table Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

67 MINING CADASTRE MINERAL RESOURCES AUTHORITY OF MONGOLIA: A Mining Sector Institutional Strengthening Technical Assistance Project has been established as a sub project of the mining sector development financed by the World Bank. The project involved implementing a Computerized Mining Cadastre System (CMCS), and was started in 2012 and successfully finished in The system installed in a modern and powerful geographic database and information security, and reliability was fully met. Head of Mineral Cadastre Department emphasized "Cadastre operational procedures are simply turned into an automatic system and have become quick and easy to access. Using this system, the procedure of awarding electronic licences will be improved and quality of the services will be also improved with efficiency, quality and quickly, so that the cadastre staff s productivity will be increased and workload will be decreased". In addition, it will benefit as serving licence information quickly and making out the transparency circumstance of licence holders and the area that ongoing exploration and exploitation procedures. Also, the domestic and foreign investors in mining sector will be able to get information on a timely basis. Standard requirement 3.9 (а) The open condition by Cadastrial 1. Licence holders 1. licence holders 2. Information of licence holders 2. Information of licenve holders 3. Coordinates of the licence area. 3. Coordinates of the licenve area. 4. Date of application for licence 4. Date of application for licenve 5. Date of licence award 5. Date of licenve award 6. Date of duration of the licence 6. Date of duration of the licenve 7. Information of Product - The transparency provided at 87.5% Table-32 The Mining Activity Reports was being submitted electronically by exploration and exploitation licence holders since The project of integrating the information data (register) of the departments, division of this authority already been launched. 63 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

68 Information about the project: A project of "Technical cooperation designed to improve the economic potential of Mongolia s mineral sector" which shall be implemented by a cooperation between the Mineral Resources Authority of Mongolia, the Geo Science of Federal Republic of Germany and the Institute of Natural Resources. The cost of the project is 1.6 million euros, financed by the Government of the Federal Republic of Germany and the implementation period was 2 years. The activities of providing information to the state and private organizations of Mongolian mineral sector, improving the capacity of Mineral Resource Authority, making economic and strategic research for certain mineral exploration, mining, processing and putting on the market, evaluating the mineral deposits in order to increase investment in the mineral sector, and having an integrated information systems are implemented by this Project step by step NUCLEAR ENERGY AUTHORITY OF MONGOLIA: The Authority is implementing new software for licences and by using this website, licence registration information will be placed on its website. This database contains more detailed information related to radioactive minerals. As well as it is able to get application on awarding new license, extending license term, returning the licence in whole or in part and to get the exploration work plan electronically OIL: There is no statutory provision relating to disclosure of petroleum production sharing agreements and licence for oil exploration and exploitation PETROLEUM LEGISLATION The Petroleum Law of Mongolia, 2014 In July 2014, the Parliament of Mongolia passed a new Petroleum Law designed to attract foreign investment in the country and replace the 1991 Petroleum Law. The new law gives a number of incentives to petroleum explorers, but does not affect the terms of contracts previously signed. Significant features include: The exploration period is eight years and can be extended twice by two years. The production period is 25 years and can be extended twice by five years. Production Sharing Contracts can be signed and approved by the Government upon Companies requests within 180 days. Royalty payments to the Government of Mongolia must be at least 5%. 64 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

69 Companies are exempt from customs duty, VAT in the first five years, and income taxes from sale of oil. Exploration, operation, development, and production costs can be 100% recovered. The annual percentage from oil to cost recovery can be up to 40%. Upon request, a company may be granted permission to build a pipeline for the purpose of transporting the petroleum that it produces The Law of Mongolia on Petroleum Products, 2005 In July 2005 the Parliament of Mongolia passed the Petroleum Products Law designed to define subclassifications of activities in relation to petroleum products. Whilst import, production, and trade activities require a licence under the Law, transportation and storage must be carried out according to the Law, but do not require a specific licence. In February 2013 the Law was amended to require an additional licence for the retail of petroleum products, which had hitherto been an unlicensed activity The Regulation of Petroleum Products Licences, Ministerial Order No. 171 The Ministry of Mining approved the regulation in August The regulation states that a Mongolian company must obtain a separate licence to engage importing petroleum products, retail trade, and wholesale trade. In addition, the licences must be issued to a Mongolian company rather than to the facility itself, as was the case under the previous regime GENERAL The Mineral Resource Authority will issue an exploration licence to an oil company that has entered into a Production Sharing Agreement with Petroleum Authority of Mongolia, or to an oil company that has won the bid for a reserve where no PSA could be agreed. The maximum term of an oil exploration licence is eight years, but can be extended twice by up to two years each time. Unconventional oil exploration licences are issued for a term of no more than 10 years, and can be extended once for a maximum of a further five years. Should the holder of the exploration licence wish to commence extraction, they must present a reserve report to the State administrative body in charge of oil affairs (MRAM) within 90 days of the expiry of the exploration term. The Authority (MRAM) will approve the reserve on the basis of the opinion of Mineral Resource Council formed by the Ministry and the Petroleum Authority. The maximum term of an oil extraction licence may not exceed 25 years but can be extended twice by up to five years for each extension. The term of an unconventional oil exploration licence can be no more than 10 years and can be extended once for a maximum extension of five years. 65 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

70 4 RECONCILIATION SCOPE AND METHODOLOGY In this section, we set out the entities and flows to government and other matters which have been included in the reconciliation; and also describe the basis on which the flows and entities were selected. We comment on the materiality threshold applied and the assurances requested from reporting entities that the information they reported was reliable. 4.1 INTRODUCTION Hart Nurse Ltd and Ulaanbaatar Audit Corporation ( the Consultants ) were required to undertake the work set out in the Terms of Reference for the Engagement. Unless noted in our report, the reconciliation has been carried out on a cash accounting basis, with both monetary and in-kind payments taken into account. In conducting our work, we have relied upon the completed reporting templates, information and explanations obtained from Covered Entities. No verification is made as to the accuracy or completeness of such information. If there are material receipts and payments omitted from the reporting templates of both paying and receiving entities, our work would not have been sufficient to detect them. Any such receipts or payments which were omitted would not therefore be included in our report unless they came to our attention through other means. This report is prepared both in English and Mongolian language. If there should be any discrepancies or contradictions between the English and the Mongolian version, the English version will prevail. Our report incorporates information received up to 05 November Any information received after this date might not, therefore, have been included in our report. 4.2 SCOPE OF THE RECONCILIATION THE EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE (EITI) The MEITI National Council meeting held on 24 th June 2010 determined that extractive companies must disclose all payments to the Government exceeding MNT 10 thousand (by taxes, fees, charges and other revenue items respectively). The payments which were to be included were also specified in the decision, and subsequently ratified by the Ministry of Finance and National Statistical Council. On 8 th May 2012, the MEITI National Council decided that all companies making payments in excess of MNT 40 million to the Government were to be included in the EITI report. During the MEITI National Council meeting on 23 December 2013, the council members specified total numbers of companies to be covered in the reconciliation; however the materiality threshold was not defined. 250 companies were recommended by the MEITI Secretariat to the National Council for inclusion in the 2013 report. 66 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

71 4.2.2 REPORTING TEMPLATES Reporting templates to be used in the 2013 reconciliation were discussed by the Working Group on 3 rd January 2014 and approved by the Ministry of Finance and National Statistical Council. The templates include payments in addition to those set out in the decision of 24 th June PAYMENT FLOWS INCLUDED The extractive industry revenues and material payments to government by oil, gas and mining companies were set out on the templates approved by the MSG on 3 rd January 2014, and are as follows:- 67 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

72 The payment flows included, and the Government agencies receiving these flows may be shown in a diagram as follows: Taxes, payments and fees GDT, CO, and LG CO Corporate Income Tax Fee and extra fee for exploitationof mineral resources Real estate tax Tax on vehicle and self moving mechanisms Value Added Tax Customs tax Excise tax on vehicle's gasoline and diesel fuel Tax on vehicle's gasoline and diesel fuel Customs service charge MRAM, NEA Payments License fee for exploitation and exploration of mineral resources Compensation for deposit exploration carried out with State budget Revenue share of the Government as per Nuclear Energy Law C O M P A N I E S PAM MOL GDT, LG SIGA MOF, GDT, SIGA, SSIA, Local Govt Bonus for signature (only year of contract) as per Production Sharin Agreement Bonus for production commencement as per Production Sharin Agreement Bonus for training as per Production Sharin Agreement Field deposit as per Production Sharin Agreement Admin service charges as per Production Sharin Agreement Fee for supporting field office as per Production Sharin Agreement Advance payments received by the Government Share of profit oil of the Government as per PSAs Fee for recruiting foreign experts and workers Fee for air pollution (coal) Land fee Fee for water use Fee for use of widespread mineral resources Social and health insurance contribution paid by entity Penalty and compensation Penalty Compensation MOF, SPC, Dividends Dividends on State property Dividends on Local property LGI Donations and supports Donations and supports provided to Government organizations Expenses 50% of environmental protection budget generated to the Special MEGD, LG Account Local Govt 68 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

73 4.3 REPORTING ENTITIES GOVERNMENT The government entities which the MSG determined were required to participate in the 2013 MEITI Report are: CENTRAL GOVERNMENT ORGANIZATION Ministry of Finance Tax Authority Ministry of Environment and Green Development (formerly, of Tourism) Mineral Resources Authority Petroleum Authority Customs Office Finance and Fund Policy Regulation Authority of Ministry of Labour State Professional Inspection Agency General Authority for Social Insurance Mongolian Nuclear Energy Authority and State Property Committee LOCAL GOVERNMENT ORGANIZATION Governor s Office (Aimag, Capital. Soum, District) COMPANIES In, 2013, 1,198 companies submitted their reports to the MEITI Secretatariat. The Secretariat provided reports of 240 companies (10 companies did not provide) to the audit consortium for the purpose of the reconciliation. The MOF issued report for 2013 covering 1,617 /participant/ companies, showing receipts by the government from these companies under the headings used in the templates approved by the MSWG for use in the 2013 EITI reconciliation. In accordance with the EITI Rules (Requirement 18(b)(ii)), the EITI reconciliation report should include all licensed or registered companies involved in the extractive sector exploration and production, noting which companies participated in the EITI Reporting process. 69 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

74 Government maintains different lists for different purposes; in particular, there is a list of companies holding licenses that is maintained by the MRAM and there is a separate list of companies maintained by the Ministry of Finance for taxation purposes. These lists are not identical, as they were prepared for different purposes, and the MOF list is used for the purpose of determining which companies should be reconciled. These two lists are both covered in this reconciliation report. The companies included in the report are listed in Appendix 2 The following chart shows the sectors in which the 250 reporting companies operate. Sectors in which reporting companies operate Gold Coal Spar Metal Rummage Copper and molybdenum oil other Chart MATERIALITY THRESHOLDS The National Council defined the material flows that should be reported by companies at its meetings on 24 June 2010 where it was determined that the reconciliation should cover all taxes, payments, fees, charges and other payments which are more than MNT 10 thousand and on 23 December 2013, where it decided upon the 250 companies to be included in the reconciliation of year Reporting templates to be used in the 2013 reconciliation were agreed by the Council on 3 January The templates include payments in addition to those set out in the decision of 24th June 2010, although this is not referred to in the Terms of Reference for the assignment. The MEITI Secretariat provided us with the schedule of receipts by government from all companies in the sector and the list of companies to be included. We have commented on the process for selection of companies in section above, and include recommendations on the matter in section 8 below. 4.5 MATERIALITY OF DIFFERENCES We have determined the differences between amounts reported by government and by companies would be treated as material where they exceeded MNT 100 thousand. We used this materiality limit as 70 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

75 a minimum margin of error to analyze within in the scope of reconciliation performance. In other words we reviewed and reconciled only on differences above MNT 100 thousand. 4.6 RECONCILIATION APPROACH AND METHODOLOGY GENERAL APPROACH The approach we have adopted for the reconciliation is summarised below: Communicated with the MEITI Secretatariat to develop suitable approaches through discussion became familiar with MEITI procedures and gained thorough understanding of it; we reviewed relevant documents, including in particular the accounting principles and treatments established for the reporting templates. Obtained initial reporting templates from the MEITI secretariat Compared company and government amounts and computed the initial differences Prepared schedules incorporating the information reported byreporting Entities and adjusted these returns to remove items which were incorrectly included (e.g. personal income tax) or miss-stated (e.g. amounts were not in thousand as required). Performed reconciliation with an aim to agree the reported amounts with the reporting entities without any discrepancies. Liaised with both Company and Government Departments to resolve discrepancies. Documented and explained all the adjustments made during the reconciliation. Explained cause of each unresolved difference and provided respective recommendations ASSURANCE The audit and assurance requirements for companies and government entities are set out in local legislation, which requires that: extractive companies financial statements should be prepared using accounting principles according to the International Accounting Standards (IAS) and these financial statements should be prepared under IFRS (International Financial Reporting Standards); 9 Government entities financial statements should be prepared according to international standards (IPSAS); 10 9 More information on International Accounting Standards International Financial Reporting Standards may be found on the website of the IFRS Foundation and the IASB: 71 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

76 Extractive companies having total assets for more than MNT 50 million are required to appoint an audit firm to certify the financial statements. The audit standards used by the audit firms should be in compliance with International Standards on Auditing (ISA) 11 ; and Government entities and companies where the Mongolian government hold part of the capital share are subject to an annual audit carried out byor on behalf of the Mongolian National Audit Office. The latter should apply working and reporting standards in compliance with international standards For purposes of the EITI Report, we followed the procedures described below in this section MANAGEMENT REPRESENTATIONS - COMPANIES We requested that a letter be provided from a member of company management making representations about the accuracy of the figures provided for the EITI reconciliation. Details ofresponses received are set out in Appendix-9. One of the representations made by companies was that the figures were consistent with their financial statements audited under international standards, and we requested that companies should provide a copy of the audit report relating to their accounts for companies did not provide an audit report, and of those which did, 10 reports contained qualifications from the auditors (see Section 8 for further details) ASSURANCE FOR GOVERNMENT FIGURES Government entities are subject to annual audit by the National Audit Office. While Government owned subsidiaries are subject to annual audit by the National Audit Office or a qualified auditing firm appointed by the National Audit Office. The government spreadsheet of receipts is signed by the State Secretary of the Ministry of Finance. There is, however, no representation or assurance given in respect of the government receipts declared to the Independent Administrator for EITI, and there is no indication of what the government signature signifies. As part of the review of presentation of government figures for EITI, this is an area which should be improved. 10 More information on these international standards may be found on the website of the International Public Sector Accounting Standards Board: 11 International Standards on Auditing (ISA) are issued by International Federation of Accountants (IFAC) through the International Auditing and Assurance Standards Board (IAASB): 72 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

77 4.7 INTERRELATIONS OF THE WORK FLOW FOR DISCREPANCIES Template 1, 2, 3 No Reconciliation Template 4, 5, 6, 7 Discrepancy Yes Classification Check Communicate MEITI Secretariat with Discrepancy Yes Verification with company No Resolved? Communicate with relevant government organisation Resolved? Report Yes No Classification; Explanation of adjustment Initial report: Unresolved discrepancy Unresolved discrepancies by items Net adjustment to company and government reports 73 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

78 4.8 METHODOLOGY DATA COLLECTION When collecting information from Government agencies, mining and oil production, and from exploration entities, EITI s MSWG used the template EITI 1-7 which was approved under the Chairman of National Statistical Committee, Ministry of Finance s Decree No.1/3/1 of 03 January Table below chart shows the formation and system of reporting template. Government EITI Template 4 The report of taxes and fees collected in local budget from minerals and petroleum EITI Template 5 The report of taxes and fees collected in state budget from minerals and EITI Template 6 The Government Report of taxes, fees and expenditures collected in state and EITI Template 7 Production and Sales Reconciliation Report of minerals and petroleum А. Contact address B. Basic informatio n C. Voluntar y basis B. Basic inform C. Volunta ry basis А.Conta ct address B. Basic inform Company EITI Template 1 The operational report of minerals extracting company EITI Template 2 The operational report of minerals exploring company EITI Template 3 The operational report of petroleum exploring or extracting company A. Contact address B. Basic information C. Voluntary basis information 74 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

79 4.8.2 DATA COMPARISON Excel spreadsheets were used to match taxes and fees paid by companies to government and local budget recorded for each indicator on the template supplied by each company (EITI Template 6) with those recorded on each company s consolidated report prepared by government organisations (EITI Templates 1, 2&3). All discrepancies arising were tabulated and analysed as significant and insignificant. The compilation of the consolidated figure(s) on MEITI Template No.1, 2 & 3 has confirmed from information provided on EITI Templates No.6 by each Government organisation and Taxation authority DATA RECONCILIATION The following were performed for each significant discrepancy: Detailed reconciliations were requested as necessary from relevant Government Organisations and Taxation Authorities (detailing the dates and amounts of receipts making up the amount disclosed on Template 6) and used to match with reconciliations of payments made by companies in order to identify the details of, and where possible explain, the discrepancy as detailed below. After considering the number, size and type (indicator) of the discrepancies that occurred for a particular company using our professional judgement based on whether the figures on Template 1, 2, & 3 reported by the companies had been audited, we made a decision with following: Reviewed the validity of data contained in MEITI Template No.1, we identified the items making up the difference. Depending on the nature of the item, this involved checking from source documents, analytical review or independent confirmation. In case of approach, not only for significant discrepancies, also for some circumstances all reported and some parts of data is covered were required to be done. Requested the relevant company to provide a copy of their reconciliation (workings detailing the payment dates and amounts) supporting the calculation of the payment figures they included on EITI Template No.1, 2 & 3. If insufficient explanation was provided in the detailed information supplied by the company, we sent protocols in respect of each unresolved difference to relevent government entities in order to obtain an explanation of the difference and its causes. Where the process did not resolve the manner in which the discrepancy (ies) should be corrected, joint meetings were held with the company and relevant government organisation to agree a solution. Discrepancies identified by the matching process have been classified by type/nature once the reasons for the discrepancy (ies) have been identified (or if necessary as unresolved). Recommendations have been given on problems faced during the preparation of those templates and determining work progress of the MEITI Secretariat. 75 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

80 Discrepancies identified are classified below. Positive discrepancy: Total reporting amount which Government has received is exceeded than the payment amount on EITI report. Negative discrepancy: Total reporting amount which Government has received is shorter than the payment amount on EITI report, which led to a shortage. Net discrepancy: Total of positive and negative discrepancies. 76 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

81 4.9 EITI PARTICIPATION CHART REVENUE OF THE GOVERNMENT OF MONGOLIA (MOF, MTA, MNET, MRAM, PAM, MCO, LSWA, SPC, GDSI, SPIA, Governor s office) EXTRACTIVE COMPANIES PAYMENTS Submit templates Submit templates Mongolia Extractive Industries Transparency Initiative Secretariat AUDITORS Receive templates Reconcile, adjust, & explain differences MEITI RECONCILIATION REPORT Using and decision-making NATIONAL COUNCIL, WORKING GROUP, OTHER GOVERNMENT ORGANIZATIONS CIVIL SOCIETY (NGO, UNION, ASSOCIATION) EXTRACTIVE COMPANIES, 77 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

82 4.10 OTHER WORK CARRIED OUT In addition to the reconciliation, we have conducted analyses and surveys in accordance with the Terms of Reference, in particular:- 1. Analysis of implementation status of procedure set forth by order of Minister for Finance of Mongolia No.45, 2010 on records of donations and assistance given to each Government institutions and non-governmental organizations (see Section 6.1) 2. Survey on whether international financial reporting standards are being applied in companies 2013 financial statements, and of the audit status of companies financial statements (see Section 6.2) 3. Survey on the implementation status of annual mining plan and plan of natural rehabilitation work (see Sections 6.4 and 6.5) 4. Report on exploration and exploitation licences of the companies (see Section 6.6) 5. Survey of contracts concluded between extractive companies and local authorities under Mineral Law of Mongolia, 2006 and art.42 (see Section 6.7) 6. Survey of all independent members of Board of state and local state property companies (see Section 6.9) The report is produced in accordance with the EITI Standard 2013, which requires the inclusion of contextual information on the extractive industries; Section 3 contains information relevant to these requirements. 78 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

83 5 RESULTS OF THE RECONCILIATION 5.1 SUMMARY OF THE RECONCILIATION INTRODUCTION In this section, we set out in more detail the amounts reported by government and companies in respect of the payment flows included in the reconciliation. This covers i. the initial returns made; ii. the interim presentation to the Working Group; and iii. the final results after reconciliation In summary, the reported flows at these three stages were:- MNT millions G O M Companies Difference % Amounts initially reported by participating entities 1,599,629 1,565,086 34, % Adjustments 176, ,360-36,707 Interim reconciliation provided to the Working Group 1,776,282 1,778,446-2, % meeting on 10 th October 2014 Adjustments -200, ,395 2,127 Adjusted amounts at conclusion of reconciliation 1,576,014 1,576, % Table-33 The reasons for the adjustments and further analysis of the unresolved differences are set out later in this section. The remaining unresolved difference of MNT 37 million is not material AMOUNTS INITIALLY REPORTED (in million MNT) No. Revenue items Initial reconciliation GOM Company Difference 1 Tax, payments, fees, dividends paid to State budget 1,473,336 1,428,787 44, Tax 518, ,698 (30,634) 1.2 Fees 666, ,566 42, Servicecharges 30,571 19,395 11, State property dividends 70,429 70,434 (6) 1.5 Government received prepayments 187, ,705 58, Other ,990 (37,808) 2 Tax, payments, fees, dividends paid to local budget 114, , Tax paid to local budget 14,733 14, Fees 65,696 64,501 1, Local state property dividend 7, , Other 26,365 34,938 (8,573) 79 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

84 No. Revenue items Initial reconciliation GOM Company Difference 3 Donations and supports provided to state 11,684 22,517 (10,833) organization Amount 1,599,629 1,565,086 34,544 Table-34 Our reconciliation work revealed that the major differences in the amounts initially reported arose due to:- The central Government have not aggregated the receipts such as fee, penalty, and donation and supports that paid to local Government in its initial report The government reported receipts of MNT 40,597 million togrogs from Oyu Tolgoi in However, this was not paid in cash by the company in 2013; rather, the company had made a prepayment in 2010 (see 2010 MEITI Report), and correctly did not include this amount in its 2013 EITI template. The government s mis- reporting the tax which was not received in cash caused certain difference. The amount deducted by Oyu Tolgoi comprised: o Corporate Income tax - MNT 3.3 million togrogs o Additional payment for Mineral resources usage - MNT million togrogs o VAT - MNT 16,143 million togrogs Some discrepancies were caused because some of the companies reported all payments paid to the customs office including customs tax, VAT, customs service fees as customs tax amounts in total. 10 companiesrequired toparticipate in the reconciliationfailed toreport, causing a difference of MNT 71,953 million togrogs. 94 companies reported a total of MNT 36,255 million togrogs of tax, payments, fees, donations and aids in their initial template as payments for reconciliation instead of in Part B Optional report of EITI s template. Some companies reported on an accruals basis instead of a cash basis TOTAL FINANCIAL STREAM INTRODUCED AT MSWG MEETING We has been commencing the Eighth MEITI reconciliation report 2013 from 23 July 2014 and introduced unresolved difference of MNT 2.2 billion at the initial meeting of the Working Group held on 10 October Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

85 No. Revenue items TOTAL FINANCIAL FLOWS AFTER RECONCILIATION (BY TYPES OF PAYMENTS) In million MNT Table-35 The reconciliation work on material differences based on additional information provided by stakeholders has reduce the total unresolved differences to MNT 37 million, as shown in the table below. (in million MNT) No. Revenue items Final reconciliation 1 Tax, payments, fees, dividends paid to State budget GOM Company Difference 1,452,544 1,452, Tax 492, , Fees 670, , Servicecharges 29,278 29, State property dividends 70,429 70, Government received prepayments 187, , Other 1,553 1, Tax, payments, fees, dividends paid to local 84,273 84, budget 2.1 Tax paid to local budget 14,556 14, Fees 58,103 58, Local state property dividend 7,817 7, Other 3,797 3, Donations and supports provided to state 39,197 39, organization Amount 1,576,014 1,576, Significant adjustments made during the reconciliation include: Initial difference Adjustment After adjustment GOM Company Difference GOM Company Difference GOM Company Difference 1 Taxes, fees, charges and dividends paid to 1,473,336 1,428,787 44, , ,445 (41,399) 1,658,320 1,655,170 3,150 State budget 1.1 Tax 518, ,698 (30,634) 183, ,670 (32,011) 701, ,306 (62,645) 1.2 Fees 666, ,566 42, ,048 (45,130) 667, ,613 (2,271) 1.3 Service charges 30,571 19,395 11,176 (700) 655 (1,354) 29,871 20,049 9, Dividend on state property 70,429 70,434 (6) - (6) 6 70,429 70, Advance payments received by the Government 187, ,705 58,961 - (111) , ,594 59, Other ,990 (37,808) 1,168 (35,811) 36,979 1,350 2,179 (829) 2 Taxes, fees, charges and dividends paid to Local budget 114, , (30,448) (25,070) (5,378) 84,137 88,688 (4,551) 2.1 Tax paid to local budget 14,733 14, (193) 241 (434) 14,516 14,542 (26) 2.2 Fees 65,696 64,501 1,195 (7,510) (1,973) (5,537) 58,186 62,529 (4,343) 2.3 Dividend on local state property 7, ,797-7,799 (7,799) 7,815 7,817 (2) 2.4 Other 26,365 34,938 (8,573) (22,745) (31,138) 8,393 3,619 3,800 (181) 3 Donations and supports provided to state 11,684 22,517 (10,833) 22,141 12,072 10,070 33,826 34,589 (763) entity Total 1,599,629 1,565,086 34, , ,446 (36,707) 1,776,282 1,778,446 (2,164) Table Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

86 There was misreporting by both the Customs Office and Oyu Tolgoi, which gave rise to significant differences. These were adjusted during the reconciliation based on information provided by both sides. The Government reported PIT and vehicle air pollution fee received from Erdenet Mining Corporation that are irrelevant to this reconciliation report. The difference was reconciled based on information provided by both sides. Government deducted the MNT 3,527 million of royalty and MNT 500 million of CIT which is total MNT 4,027 million from the payments of tax inspection act The discrepancies were caused because the company had not reported the amounts both at the reporting year tax and other tax recovery section in the EITI template. Therefore we adjusted it based on both sides information. The Government reported a tax receipt from Oyu Tolgoi amounting to MNT 40,597 million, which was not actually paid in cash, as explained elsewhere.tax and payment stream of amount in the section Optional reporting of EITI report template has been deducted and reconciled. Detailed schedules showing the figures originally reported by entities participating in the reconciliation, adjustments made as a result of our work, and the figures finally reported are set out in Appendix 1 A and B by type of flow and by company. 5.2 UNRESOLVED DIFFERENCES INTRODUCTION Upon termination of the reconciliation, differences amounting to MNT 36,840 thousand remain unresolved. Thi amount constitutes % of the taxes, fees, charges, donations and supports the Government received and is not material The nature of an unresolved difference is that the reasons for the difference are not known and it is not possible to adjust one or both the figures reported by the government or company participant. It is possible, however, to summarise the generic reasons, as shown in the table below. Cause GOM Companies Amount (thous.mnt) Additional information was not provided (31,954) 254, ,342 Information provided by both sides does (87,970) (77,773) (165,743) not match Companies did not provide comprehensive 8,008 (126,177) (118,169) information Taxes paid/received were not reported by (200) 1,644 1,444 the companies and GOM Comprehensive information provided but 23, ,457 does not meet requirement Immaterial < MNT 100 (66) (104) (170) 82 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

87 Misclassification of taxes paid Total (88,770) 51,930 (36,840) Table-37 We observe that 91% of the unresolved difference relates to the General Department of Customs. We further observe that the GDC has not been prompt in assisting with resolving the differences, and has advanced a number of reasons for its inability to participate effectively UNRESOLVED DIFFERENCES BY FINANCIAL FLOW The table below shows:- i. The initial differences between figures reported by government and companies; ii. iii. Adjustments made to government and company submissions, based on evidence provided by the reporting entity; The adjusted government and company figures after reconciliation; and iv. No. 1 The unresolved differences on each financial flow Revenue items Taxes and fees paid to State budget Initial differe nce Adjustment GOM Compa ny Differe nce After adjustment GOM Company Unresolved difference 44,549 (23,270) 21,125 (44,396) 1,450,066 1,449, Taxes (30,634) (25,140) (55,741) 30, , ,957 (33) 1.2 Fees 42,859 1,792 44,453 (42,661) 668, , Service charges 11,176 (1,292) 9,883 (11,175) 29,278 29, Dividends on State property Avdance payment received by the Government (6) - (6) 6 70,429 70,429-58,961-58,961 (58,961) 187, , Other (37,808) 1,371 (36,425) 37,796 1,553 1,565 (12) 2 Taxes, fees, charges and dividends paid to Local budget 828 (27,857) (26,913) (944) 86,752 86,868 (116) 2.1 Taxes paid to Local budget 409 (177) 244 (421) 14,556 14,568 (12) 2.2 Fees 1,195 (5,114) (3,871) (1,243) 60,582 60,630 (48) 2.3 Dividends on Local state property 7, ,799 (7,797) 7,817 7, Other (8,573) (22,568) (31,085) 8,518 3,797 3,853 (56) 3 Donations and supports provided to State entities (10,833) 27,512 16,753 10,759 39,197 39,270 (74) Total 34,544 (23,615) 10,965 (34,581) 1,576,014 1,576,051 (37) Table Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

88 The commencement of the EITI reconciliation report coincided with the busiest time of extractive industries, also with the most State, Government and entities vacation period, so it delayed receiving of information to clarify in the date stated in official letter, and caused significant delays in the process of reconciliation. The main causes of the unresolved differences are: Unresolved differences of Mongolbulgargeo, Bujgar Ord and Ugalzan Tsamkhag companies who did not provide their report for FY 2013 to EITI Secretariat as well as information during the reconciliation constitute 42% of total positive differences. Some local administrative offices responded that some taxes, fees, charges, donations and supports were not received. On the other hand, the companies presented their supporting documents to prove their payments. So the differences caused by this situation constitue 51% of total negative difference. There were cases that the companies paid penalties but wrote individual s name on the payment voucher instead of writing the company name. In these cases, the penalties cannot be found by Payer Company s name in the MOF Treasury fund state revenue software. Due to such causes we could not prove the companies payments with the information provided by the Government. Further details are given in section OVERVIEW OF REASONS FOR UNRESOLVED DIFFERENCES COMPANIES DID NOT PROVIDE ADDITIONAL INFORMATION No. Companies Amount (thous.mnt) 108 Mongolbulgargeo 160, Yong Sheng Ming 82, Khunt-Uguuj (11,910) 175 Ten Hun (5,660) Other (3,265) Total 222,343 Table-39 Difference caused by Mongolbulgargeo remains unresolved. The reason is the company did not provide the report for FY2013 to the EITI Secretariat. So the EITI Secretariat and Ulaanbaatar Audit Corporation jointly sent an official letter No.2/196 on 14 August 2014 requesting the report and comprehensive information. We requested response several time however, we could not obtain any information from the company. 84 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

89 Difference caused by Yong Sheng Ming remained unresolved. We requested the company s director and accountant many times over the phone to obtain comprehensive information, however they did not give us information DIFFERENCE CAUSED BY MISMATCH OF INFORMATION PROVIDED BY BOTH SIDES No. Companies Amount (thous.mnt) 250 Yong Sheng Ming (52,178) 233 MCTT (17,645) 121 MONENKO (15,667) 123 Munkhnoyon Suvarga (13,809) 246 Etugen-Eye (9,493) 221 Shine Ilion Nen Yuan (8,953) 97 Coge Gbi (7,256) 17 Areva Mongol (7,086) 150 Centerra Gold Mongolia (6,035) 192 Khotu (5,066) 199 Khuree Del (5,000) 85 Ilt Gold (5,000) 102 MalleFluorite (5,000) Other (7,555) Total (165,743) Table-40 The differences remain unresolved due to mismatch of information provided by relevant Government entities and the companies. For instance, information of Yong Sheng Ming was provided by the Government entities in detail, but the company itself did not submit comprehensive information; mismatch of MCTT s work place fee for foreign experts and workers, vehicle tax, customs service charge and water use fee; and mismatch of donation and support paid by MONENKO and customs tax paid by Munkh Noyon Suvarga. For the unresolved differences of tax on vehicle and self moving mechanisms, 50% deposit of environmental protection cost and donations and supports provided to state entities; the companies declared they paid but the Government on the other hand reported as unreceived (We obtained copies of payment vouchers of the companies). Please refer to Appendix Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

90 COMPANIES DID NOT PROVIDE COMPREHENSIVE INFORMATION Companies Amount (thous.mnt) 41 Bujgar-Ord (71,846) 115 Mongolyn Alt MAK (34,496) 101 Lut Chuluu (7,778) Other (4,049) Total (118,169) Table-41 It was not possible to reconcile and resolve the difference of Bujgar-Ord based on the Government s figure as we could not contact or obtain information from the company s management or accountant NON-REPORTING OF TAX PAYMENTS BY THE COMPANIES AND RECEIPTS BY THE GOVERNMENT Companies Amount (thous.mnt) 115 Mongolyn Alt MAK 2,364 Other (920) Total 1,444 Table THE INFORMATION RECEIVED IS NOT ADEQUATE FOR RECONCILIATION. Companies Amount (thous.mnt) 97 Coge Gobi 19, MDFE 10, Bayan-Airag Exploration (5,658) Other (457) Total 23,457 Table-43 The differences occurring here relate to customs service charges. Although the companies provided us with detailed information on customs tax and charges paid, the Government provided receipt of customs tax, VAT and customs service charges in total amount (total amount the company paid for the year) but not in detail. So it was not possible to reconcile the figures of both sides and identify causes of differences. 5.3 OTHER INFORMATION FROM REPORTING ENTITIES Information was provided to us on production of minerals in Details are set out in Appendix 11. A summary of the information provided by MRAM on production and sales of reporting companies is shown in the table below 86 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

91 No. Commodities Production Sales Quantity Amount (thous.mnt) Quantity Amount (thous.mnt) 1 Copper concentrate 801, ,489,270, , ,204,396, Molybdenum concentrate 3, ,186, , ,188, Gold 7, ,185, , ,701, Silver ,700, , ,078, Coal 7,190, ,661, ,115, ,870, Bituminous coal 1,042, ,757, ,126, ,912, Pitch , , Semi coked coal 1, ,449, , , Concentrated coking coal 5,306, ,800, ,421, ,632, Cola (by-product) 2,289, ,892, ,318, ,880, Coked coal 8,635, ,544, Spar concentrate 84, ,055, , ,572, Spar ore 18, ,100, , ,550, Iron ore 4,099, ,151, ,183, ,862, Iron ore concentrate 2,851, ,441, ,929, ,280,036.6 (monolith) 18 Iron ore concentrate 3,891, ,434, , ,946,065.4 (ground) 19 Brick 5, , , , Lead concentrate 1, ,075, , ,744, Wolfram concentrate ,765, ,765, Sodium sulfide 1, , , Tin concentrate ,860, Zinc 114, ,707, , ,661,080.5 Table Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

92 6 ADDITIONAL SURVEYS REQUIRED BY THE TERMS OF REFERENCE The Terms of Reference require a number of surveys to be carried out and included in the Mongolia 2013 EITI Report. These surveys are:- 1. Analysis of implementation status of procedure set forth by order of Minister for Finance of Mongolia No.45, 2010 on records of donations and assistance given to each Government institutions and non-governmental organizations 2. Survey on whether international financial reporting standards are being applied in companies 2013 financial statements, and of the audit status of companies financial statements 3. Survey on the implementation status of annual mining plan and plan of natural rehabilitation work 4. Report on exploration and exploitation licences of the companies 5. Survey of contracts concluded between extractive companies and local authorities under Mineral Law of Mongolia, 2006 and art Survey of all independent members of Board of state and local state property companies This section is a summary of the work carried out and the results of the surveys. 6.1 IMPLEMENTATION OF ORDER NO.45 OF THE MINISTER OF FINANCE, MONGOLIA Government Resolution No.222 was approved in 2012 to ensure transparency of the extractive industries. The resolution required the preparation of reports showing amounts paid in respect of taxes, fees, service charges, dividends, penalties, donations and contributions to local budgets by entities and sub-contractors operating in minerals and oil in respective territory. These reports were to be based on audited financial figures.. Activity to publicise the information was to be implemented from 2012 and information was to be submitted to the State administrative body in charge of taxation by 15 th April of each year. However, differences occurred due to not including or incomplete aggregation of donations and supports provided to state entities and local budgetary entities. The chart below shows implementation of the MOF Order by soums, by aimags and by State and government organizations for Ulaanbaatar city: 88 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

93 Arkhangai Bayankhongor Bulgan Gobi-Altai Gobisumber Darkhan Uul Dornogobi Dornod Dundgobi Orkhon Umnugobi Sukhbaatar Selenge Tuv Uvs Ulaanbaatar Khovd Khentii Mongolia Eighth EITI Reconciliation Report Not implemented Implemented Chart-19 In the case of aimags, 59 soums have implemented the order No.45 but 61 soums have not. In the case of state entities in the capital city, the following entities have not implemented the order No.45: General Authority for Border Protection, Labour Support Fund, Bogd Khaan Palace Museum, Choijin Lama Museum, The Fine Arts Museum, Theatre Museum, National Museum of Mongolia, Vocational Training Center of Ministry of Labour; and National Centre for Maternal and Child Health. Please refer to Appendix 7- a, b for detail of implementation of the Order No.45 by State and local organisations. 6.2 APPLICATION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) AND AUDIT STATUS OF FINANCIAL STATEMENTS As part of our work, we requested all 250 reporting companies to send a copy of their audit report for the year 2013 (or the most recent audit report if this was not available) and we reviewed the reports received for a statement by the auditors that IFRS and IAS (International Accounting Standards) had been used in preparation of the financial statements 89 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

94 the audit was carried out using International Standards on Auditing and we recorded whether the audit opinion was unqualified or not. The response to the survey was:- Companies which supplied an audit report 205 Companies which did not supply an audit report 45 Total of reporting companies 250 This means that 22% of companies did not respond to this request. For the 205 companies which responded 181 had an unqualified audit report 16 had a qualified audit opinion 2 had a disclaimer of auditors opinion. 6 were not audited Analysing the replies received from companies, 88.3% had an unqualified opinion, 8.8% qualified or other types of audit opinion and 2.9% replied no audit was done. Audit opinion result for 2013 Unqualified opinion Qualified opinion Disclaimer of audit opinion not audited 7.8 1% % Chart ANALYSIS ON IMPLEMENTATION OF MINING DEVELOPMENT PLAN MRAM provided details of the commodity produced in respect of 92 mining companies, excluding coal producers (see table below). Of the 159 companies for which information was not provided, 65 companies were exploration licence holders and 93 were exploitation licence holders. 90 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

95 N Company Reg.No. Minerals o1. name Adil-Och contained Fluorspar 2. Altain Khuder Iron 3. Altan Dornod Alluvial gold 4. Andiin Gold bench Temuulel 5. Ankhai deposit Iron ore 6. Bayan Airag Gold 7. Bayanjonsh Ore 8. Bayantegsh Spar 9. Bayan-Erdenes Gold 10. Bold Tumur Iron ore 11. Boroo Gold Gold 12. Bulgan Gangat Gold 13. Gazar Khevlii Gold 14. GBNB Gold 15. Gurvan Gold 16. Darkhan Iron ore 17. Datsan Trade Gold 18. Dorniin khuder Iron ore 19. Dunfanlunma Fluorspar 20. Dun-Erdene Gold 21. Dun Yuan Pot lead 22. Jump-Alt Gold 23. Jinghua Ord Ore 24. Jotoin bajuuna Gold 25. Zasag Iron 26. Zhu Yu E Iron ore 27. Ilt Gold Gold 28. Infinitespace Iron ore 29. Commod Spar 30. Lut Chuluu Iron ore 31. MARCO POLO Gold 32. MEMS Fluorspar 33. Monvolifrom Wolfram 34. Mongolbulgar Gold 91 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation N Company Reg.No. Minerals o35. name Mongoljuanli contained Fluorspar 36. Mongolrustsev etmet Gold, spar, coal, silver 37. Mongol Czech Fluorspar 38. Mongol Alt Coal & gold 39. Mondulaan Gold bench 40. Monlaa Iron ore 41. Monpolymet Gold 42. MONSKORP Wolfram 43. NABD Gold 44. NK Mud & brick 45. Northwind Spar 46. New Pearl Gold 47. National Sulfir 48. Chemical Olova Tin 49. Orloivan Spar 50. Oyu Tolgoi Copper &, gold 51. Uguujbayan Gold 52. Khangai Urmun-Uul Gold 53. Reo Metal and gold 54. CMKI Fluorspar 55. Sonor Trade Gold 56. SS Mongolia Wolfram 57. Tod-Undraga Gold 58. Tom Shijir Gold 59. Ten Khun Gold 60. Tenuun Baigal Fluorspar 61. Ulz Gol Gold 62. Uuls Zaamar Gold 63. Focus metal Iron ore 64. mining Khankhas Fluorspar 65. Trade Hong chang li Tin, Wolfram 66. Khoskhas concentrate Gold 67. Khotu Gold 68. Khunt-Uguuj Fluorspar N Company Reg.No. Minerals o69. name Khurai contained Gold. 70. Khuder Gold & silver Erdene 71. Khuslemj Gold, iron, 72. Kherlen-Impex copper, Fluorspar 73. Kherlen Spar polymetal Energo 74. Tsairtmineral Ore, exploration 75. Tsogt-Onon site Wolfram 76. Tsevdeg Gold bench 77. Tsengeg-Orog deposit Gold 78. Chinkhash Iron ore 79. Chuluut Spar 80. International Shanjin Ord Iron 81. Shijir Talst Gold 82. Shin Shin Combined metal 83. Shine Mandal Gold bench 84. Urguu MDFE deposit Fluorspar 85. MJB Spar 86. MCTT Spar 87. Erdene link Tin & wolfram 88. Erdenet Copper & 89. Erdenes Group molybdenum Iron ore 90. SBF Gold 91. SJ Mining Gold 92. Erdenes Yong Sheng Ming Lead Table-45

96 The below table shows the Mining Development Plan and its performance of 117 companies (duplicated) by 15 mining productions: Production volume is expressed as its unit. (See details in Appendix 12 (a,b)). Analysis on Environmental protection and rehabilitation and Mining Development Plan and its performance are based on information provided by MRAM. Table Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

97 9 out of 41 gold mining companies which are significant for earth removal, ore mining, ore processing, product output and its sales are summarized below: Table-47 8 of 15 companies which mine iron and iron ore and produce concentrate which are significant for earth removal, ore mining, ore processing, product output and its sales are summarized below: 93 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation

98 Table Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation